Capital flows to emerging economies ‘under control’

MANILA, Philippines -  Capital flowing to emerging markets remains “under control,” the International Monetary Fund (IMF) said.

“Across the emerging economies, policymakers worry that exceptionally loose monetary policy will affect exchange rates and capital flows and threaten financial stability through high asset prices and rapid credit growth,” IMF Managing Director Christine Lagarde said in a speech.

“Right now, these risks appear under control. Capital is flowing to emerging markets mainly because of good policies and good prospects in these markets,” Lagarde added.

In her speech, copies of which were distributed to local reporters yesterday, Lagarde reiterated developing nations – such as the Philippines – will need to build their “defenses” against possible outflows or reversals.

Near-zero interest rates abroad, particularly in debt-ridden Europe and the US, have caused investors to position their funds in emerging markets, prompting central banks to be on guard against potential asset bubble formations.

Macroprudential measures can target and manage capital inflows, Lagarde said, who also mentioned having the “fiscal policy space” to respond to economic threats if needed.

The advanced economies, for their part, would need to ensure austerity measures are having the desired effect of reducing debts and being able to finance growth once again. The IMF chief said this would allow monetary authorities to hike rates slowly.

At the same time, emerging markets are not exempted from ensuring financial institutions are healthy. In particular, emphasis was given on banks and how they should balance taking risks with their capability to handle them.

“We simply cannot have pre-crisis banking in a post-crisis world. We need reform, even in the face of intense pushback from an industry sometimes reluctant to abandon lucrative lines of business,” Lagarde explained.

“Global policymakers have certainly made significant progress on more stringent capital and liquidity requirements and capital surcharges for global megabanks, as well as clear standards for supervision and resolution,” she said.

With correct policies in place, emerging markets – or the so-called “first speed” economies – are expected to continue to lead global economic growth. Afterwards, focus should now be given on how to ensure growth is sustainable, job-creating and inclusive.

The IMF, in a recent policy paper, called on developing markets to adopt “jobs strategies” to complement growth techniques so that economic benefits are felt on the grassroots level.

Lagarde said income inequality matters for a sustainable growth in the future.

“Equity also matters because, as tough times continue, we see signs of adjustment fatigue and rising social tensions,” she said.