IMF issues warning on capital outflows

MANILA, Philippines - On what seemed to be a reverse of what it warned about months back, the International Monetary Fund (IMF) now wants emerging markets, such as the Philippines, to prepare for capital outflows.

“In emerging market economies, the focus should be on boosting potential growth while dealing with the capital outflows, which may follow from the exit of the US from quantitative easing (QE),” IMF chief economist Olivier Blanchard said last week.

“We have to accept the fact that as monetary policy normalizes in the US...some of the investors which had gone to emerging market countries in particular will want to repatriate (back their funds),” he explained.

His statements were made on a press briefing held by the IMF last Tuesday to mark the release of its World Economic Update. The transcript of the briefing was posted on the IMF website.

In the past, the multilateral agency had warned against capital inflows, which had seen Asian currencies rising in value to the detriment of exports as well as concerns of asset bubble formations.

This time around, Blanchard said, the already slowing growth in developing nations will come under threat once the QE, the $85-billion monthly bond buying program in the US, tapers off later this year as indicated.

Based on the IMF’s latest projections, emerging markets are projected to grow 5.4 percent this year and the next, slower than the 5.3 percent and 5.7 percent for 2013 and 2014 seen in April.

The Philippines, however, is projected to grow faster at seven percent and six percent, respectively.

The US Federal Reserve, last month, sent Asian financial markets on a roller-coaster ride after it said it may reduce cheap money, most of which found their way to the region, once the US economy showed more signs of recovery.

“So I have no doubt that the trend, although there will be a lot of volatility around it, the trend will be for some of the capital to return to the US,” Blanchard said.

“The question is whether all the capital which went to emerging market countries will return to the US and my sense is no,” he pointed out.

While US bonds and stocks may gain, the IMF official insisted emerging countries will remain on investors’ radars, especially on those countries where growth and profit prospects “are actually better.”

Blanchard did not specify any country, but said it should be kept in mind that the global economy remains on a “three-speed mode” with developing nations leading with healthy growth, US recovering and Europe still mired in crisis.

“I think much of the capital which went to emerging market countries went there because their growth prospects, their profit prospects, are actually better than those of advanced economies. So a lot of capital will remain there,” he explained.

“But yes, we can expect a trend towards capital outflows from emerging market countries,” he added.