Emerging marts have room for monetary easing - IMF

MANILA, Philippines - Many emerging markets still have room for monetary easing to respond to large external shocks, the International Monetary Fund (IMF) Global Financial Stability report said.

“Many emerging markets with policy room to respond to shocks would still benefit from further rebuilding of policy buffers at this stage, given strong commodity prices and still-favorable liquidity conditions,” the report said without specifying which nations have enough policy space.

Inflation is within “targeted ranges, suggesting scope for further cuts in interest rates should large shocks materialize,” the report added.

Philippine inflation slowed to 2.8 percent in June, bringing year-to-date average to three percent or at the lower-end of the central bank’s three- to five-percent target. The economy, meanwhile, grew by a faster-than-expected 6.4 percent in the first quarter.

In its World Economic Outlook Update released on Monday, the IMF predicted global growth of 3.5 percent this year with emerging nations expected to expand at a faster 5.6 percent. Both predictions were however slower than the IMF’s April forecasts.

ASEAN-5, which includes the Philippines, is expected to grow 5.4 percent, the same pace forecasted by the IMF three months ago.

The multilateral agency noted that emerging markets are facing “extraordinary uncertainty” from problems in the eurozone and a sluggish growth in the United States. It pointed to a reversal of recent gains in both equity and bond flows to these markets due to risk aversion.

Data provided in the report showed emerging markets enjoyed net inflows to their bond and stock markets from February to March, before incurring net outflows again beginning April until June.

Analysts have said risk aversion resumed then due to uncertainties in the outcome of the second Greek elections after first polls failed to result in a coalition that will back the terms and conditions of the 130-billion euro bailout granted to Greece.

“Compared to equity flows, there have been minimal bond flows out of local markets. Indeed, many foreign bond investors have opted to hedge currency risk selectively rather than withdraw from markets,” the report stated, adding that this caused bond yields to fall due to huge demand.

Market volatility is expected to continue, the IMF said, posing “significant challenges” to policymakers.