March 18, 2015
The Head of the International Monetary Fund (above) warned on Tuesday that emerging markets are set to face a renewed period of economic instability when US interest rates rise this year, forecasting a repeat of 2013’s damaging “taper tantrum” episode of capital flight and rapid currency depreciation.
The remarks by Christine Lagarde, given during a speech in India, come one day before Federal Reserve chairwoman Janet Yellen is expected to signal an end to the Fed’s policy of low-rates guidance on Wednesday, with global investors bracing for an initial rise in US rates as early as June.
The IMF chief said she feared that negative “spillover” effects from these increases would lead to a re-run of the crisis that hit developing economies such as India and Turkey nearly two years ago, following hints from then Fed chair Ben Bernanke about an early end to the institution’s bond purchasing programme known as quantitative easing.
“I am afraid this may not be a one-off episode,” Ms Lagarde said. “The timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets.”
Ms Lagarde spoke at an event in Mumbai alongside Reserve Bank of India governor Raghuram Rajan, who has warned repeatedly about the dangers to developing economies of ending loose monetary policy in America, Japan and other industrialised economies.
Developing economies have seen a surge in capital from the industrialised world over recent years, receiving $4.5tn of gross capital inflows between 2009 and 2012, according to IMF data, or half of all global capital flows during that period.
Ms Lagarde also warned that emerging economies faced a second risk from the recent strength of the US currency, with indebted companies that took advantage of low rates to borrow in dollars facing sudden and steep jumps in debt servicing costs.
India’s corporate sector, which is already dealing with concerns over corporate indebtedness and weak bank capitalisation, was “not immune to this vulnerability”, she said, noting that dollar denominated corporate debt had risen “very rapidly, nearly doubling in the last 5 years” to $120bn.
“The appreciation of the US dollar is also putting pressure on balance sheets of banks, firms, and households that borrow in dollars but have assets or earnings in other currencies,” she added.
Facing these twin threats, Ms Lagarde urged emerging market governments to enact economic reforms to raise growth, improve their current account positions and gradually liberalise financial markets.
The IMF head also called on emerging market central bank governors to prepare emergency measures to support under-pressure currencies and companies struggling with debt repayments.
“Temporary — though aggressive — domestic liquidity support to certain sectors or markets may be necessary, along with targeted foreign exchange interventions,” she said.
In December the Bank for International Settlements warned there was a risk of a potential repeat of the late-1990s emerging market crises because international banks had since 2008 increased cross-border lending into emerging economies.
By the middle of last year, according to the BIS, lending into emerging economies had risen to $3.1tn, most of it denominated in dollars.
Din Merican: the Malaysian DJ Blogger 
Only Malaysia’s Zeti is not concerned. She is confident that our economy is resilient. Our banking system remains sound. Do you agree? –Din Merican
Malaysians who have access to hard currency (e.g. kids working in foreign countries such as USA who can send money home to them) will benefit from a ringgit currency crisis. One ironic result of public policies that drive
“pendatangs” to live and work overseas.
Dato’
The IMF isn’t concerned over Malaysia either. Read the Article IV report:
http://www.imf.org/external/np/sec/pr/2015/pr1588.htm
http://www.imf.org/external/pubs/cat/longres.aspx?sk=42761.0
From the summary:
“KEY ISSUES Near-term outlook. Prospects for Malaysia’s well diversified economy are favorable despite lower prices for its exports of energy and other commodities. Growth is expected to moderate in 2015 to 4.8 percent from 5.9 percent in 2014. Headline inflation will increase slightly, to 3.2 percent in 2015 from 3.1 percent in 2014, reflecting the net impact of subsidy rationalization, Goods and Services Tax (GST) implementation, and exchange rate depreciation. Inflationary pressures should remain subdued, aided by lower oil and gas prices. Impact of lower oil prices. The sharp decline in energy prices is expected to have a modest negative impact on Malaysia’s near-term growth prospects and lower its current account surplus. Although lower commodity prices will be a drag on the economy, manufacturing exports should get a boost, aided by a weaker exchange rate and higher growth in the U.S. Macroeconomic policy mix. The current macroeconomic policy mix is appropriate. Fiscal consolidation is well timed, appropriately paced, and remains on track. While monetary policy is on hold reflecting increased global uncertainty, a market-driven tightening of domestic liquidity and financial conditions is under way. Fiscal Policy. The elimination of fuel subsidies and introduction of the GST are timely and decisive reforms with long-lasting benefits. In the near term, eliminating fuel subsidies will help offset the fiscal impact of lower energy revenues. In the medium term, these reforms will also help the authorities diversify budgetary revenues, balance the budget, and lower the debt to GDP ratio. Financial stability. High house prices and household debt remain a concern, although rising real interest rates should dampen growth of financial risks. BNM is pro-actively managing the risks through stress testing, enhanced supervision, and targeted macroprudential policies. Nevertheless, further macroprudential measures may be needed. Structural policies. The authorities are implementing structural reforms on a wide front in support of Malaysia’s goal of achieving high-income status by 2020. Continued investment in infrastructure and in research and development can help spur home-grown innovation. Together with improvements in the quality of education and increased female labor force participation, these efforts can help raise productivity, support higher sustainable growth, and foster a more inclusive society.”
Unfortunately, the venerable IMF has maintained a dignified silence on Quantitative Easing. Now that option may be used by EU. That is whay it pays to be cash rich. Like that King in the game of draught you can go where you like.
Stolen money is returned :
http://www.bbc.com/news/world-africa-31933083
So what if it will be disastrous? Given what PAS has done, Najib could have us all eating from Rubbish bins and he would still be in power…
If we believe in Jeti, we have no problems. After all she is not even bothered if billions are siphoned away.
As far as the IMF is concern, they are not paid in ringgit. They just get their report from the Malaysian government and put their chop to it.
That’s how things work these days.
Be skeptical about IMF’s sunny predictions.
Especially for a kleptocratic regime such as that
ruling 1Malaysia:
http://ftalphaville.ft.com/2014/10/07/1997772/moneysupply-imf-getting-it-wrong-again-and-again/
@MT Lai
The Article IV reports are annual consultations with IMF member governments, not paid reports. Given the ideological differences and occasional contentious relationship between BNM and the IMF, the idea that Malaysia’s IMF Article IVs are rubber stamped is ludicrous.
@Phua Kai Lit
The IMF are so “sunny” this year, they’ve cut global growth projections across the board.
One more comment:
GST exemptions will give us an idea of which groups are powerful politically in Malaysia (also, which groups the 1PM want to appease). We can expect the burden on GST to fall on the shoulders of the politically weak and those who can be ignored by UMNO Baru-BN.
Din,
Well, according to hishamh and he has given you all facts, everything is fine with Malaysia. Najib and his husband, Rosmah can continue to spend billions. Malaysia is damn rich. Perhaps, Najib should go back in time to help the beleaguered Jim Callaghan’s government. Najib or perhaps Hishamh should advise the then chancellor of exchequer, Denis Healey (He is still alive) how to hantam IMF better.
Denis Healey has once said
If you are in the hole, STOP DIGGING!
Ok, perhaps, Najib as Minister of Finance far powderful than Denis
http://en.wikipedia.org/wiki/Denis_Healey
“As Chancellor, in 1974 he inherited an even worse picture. Oil prices had quintupled overnight (before Britain had any of her own). The world economy was in turmoil, Britain was on a three-day week and on the edge of hyper-inflation. All of these problems had to be faced by a minority Labour Government, in the face of a Labour Party haunted by memories of past “betrayal” and congenitally opposed to spending cuts imposed by foreign bankers. (Denis Healey envies Gordon Brown for his inheritance of a benign economy and a docile party). As Chancellor, he faced down five years of uninterrupted economic and political crisis. For good or ill, he made more policy decisions and introduced more economic measures and packages than any previous Chancellor. At the end of his term, the British economy was intact and out of debt, inflation contained, unemployment falling each month (without the aid of statistical manipulations) and living standards improving, especially for poor and disabled people.”
What a load of rubbish. The International Mother Fakirs and their banksters are the biggest hypocrites and cheats on the planet!
It will be business as usual regardless of market stability.
Their biggest fear is when debtors wise up and refuse to pay back their debts, when sovereign debts are defaulted.
Their worst nightmare will be their day of reckoning when they are no longer able to control corrupt regimes the way they manipulate corrupt and inept politicians like puppets on a shoe string.
Some food for thought to chew on 🙂
http://en.wikipedia.org/wiki/New_Development_Bank
http://www.washingtonsblog.com/2015/03/week-2-major-american-allies-ignored-u-s-pleas-joined-chinas-alternative-bank.html
@looes74
I really don’t know why people are so down on the economy. Apart from oil & gas (really only oil, gas is doing fine), the rest of the economy looks ok to me. Out of all the countries in East Asia, only the Philippines is looking better this year.
@Phua Kai Lit
“Malaysians who have access to hard currency (e.g. kids working in foreign countries such as USA who can send money home to them) will benefit from a ringgit currency crisis. One ironic result of public policies that drive
“pendatangs” to live and work overseas.”
Like in Australia, Europe, Japan, the UK, Canada perhaps? You might want to check what has happened to those currencies first.
Yes, hishamh
When the ringgit goes into free fall, parents with adult children working overseas who send back currency such as renmenbi and USD will be laughing all the way to the bank, and snapping up real assets. Foreigners too, if IMF succeeds in prying up protected sectors of the Malaysian economy.
Remember the Thai economy of the late 1990s ?
Hishamh,
As much as I respect your opinion, sorry to say that I don’t really have much faith in Malaysia financials especially run by such incompetence government. My opinion is that God has always been extremely kind to Malaysia. And when it plunges………God forbid, it would be a total mess.
Sabah would be turned into Malaysian version of Northern Ireland. (Northern Ireland used to be the most industrialised part of Ireland. Titanic was built there). Sarawak will definitely secede from Malaysia.
Ahhh … I should mention those elderly “pendatangs” living in Malaysia with adult children working in Singapore, who benefit from a Sing dollar appreciation vis-a-vis the RM too. 🙂
My old CPF account still in Singapore is increasing (in terms of RM) by the day. 🙂
@Phua Kai Lit
1. I should mention that I’m half Chinese and my wife is Indian. All these comments about pendatangs goes quite over my head.
2. “When the ringgit goes into free fall, parents with adult children working overseas who send back currency such as renmenbi and USD will be laughing all the way to the bank, and snapping up real assets. Foreigners too, if IMF succeeds in prying up protected sectors of the Malaysian economy.”
The very definition of FDI, which I don’t think anyone has so far objected to. Also, both the IMF and the World Bank have over the past decade moved away from the Washington Consensus.
3. “My old CPF account still in Singapore is increasing (in terms of RM) by the day.”
Enjoy it while it lasts.
In a surprise move, MAS eased their policy settings in January, which means effectively cutting in half the pace of appreciation of the SGD against the MYR, from around 2% per annum to 1% per annum. Trade and production numbers this year have been so poor that there’s a consensus that they will have to ease policy again at the more usual April meeting, either by recentering the FX intervention band or by widening it.
Either way would mean an immediate drop of the SGD by 1%-2%, and an even slower pace of appreciation than before, if not what would effectively be a fixed peg against the MYR. Since July, MAS has had to spend 2.5x more in reserves defending the SGD than BNM has done for the MYR. Out of all the economies and currencies I cover, the only ones that check out as fundamentally overvalued are the SGD, the Thai Baht and the Indian Rupee.
No need to take my word for it:
http://www.businesstimes.com.sg/banking-finance/singdollar-stung-by-speculative-shorting
The two economies I worry most about in East Asia are SG and HK (I’ve long since given up on Thailand). Lots of red flags for both, but the biggest threat is Fed tightening, because of the direct pass-through from FX policies. I’d underweight Malaysia too, but only because valuations are still on the expensive side. Otherwise, the economy is doing ok.
@looes74
I don’t think Malaysia is all that unusual in terms of poor fiscal management. This is inherent in the nature of government (scandals included).
Here’s a sampling from the US:
http://fee.org/freeman/detail/most-outrageous-government-waste
Here’s a few examples from the UK:
http://www.dailymail.co.uk/news/article-2342045/120billion-money-drain-EVERY-year-The-astonishing-Whitehall-waste-send-British-family-annual-luxury-holiday.html
More importantly, the depreciation of the Ringgit isn’t an isolated case. Very nearly all currencies have gone down against the USD in the last nine months, and will continue to do so over the next year or so. The Ringgit isn’t even the worse performer, or even in the bottom 20.