Group of 20 finance chiefs must coordinate currency policies to prevent too many emerging markets from implementing capital controls and accumulating reserves, said Olivier Blanchard, the International Monetary Fund’s chief economist.
G-20 policy makers are meeting in South Korea through Oct. 23 amid concern that countries are pursuing weaker exchange rates as a route to stronger economic growth, either by limiting currency gains with interventions like China or by discussing possible monetary easing, as the U.S. and U.K. have done.
The emerging market currency gains are part of a global economic restructuring, Blanchard told reporters in Santiago, Chile. As the global economy recovers from recession, developing nations must seek ways to spur domestic demand while the U.S. tries to increase exports and U.S. consumers spend less, he said.
“The goal of the G-20 should be to allow for this rebalancing,” said Blanchard, who is in Chile to attend a central bank seminar. “The important point is that in emerging market countries -- not all of them again, but on average -- an appreciation is needed for the world to recover fully.”
The Hungarian forint has strengthened 13 percent against the dollar in the past three months, leading the 25 emerging market currencies tracked by Bloomberg. Chile’s peso has appreciated 7.8 percent, beating out six other major currencies in Latin America.
China Rate Decision
China’s decision to increase its benchmark rate for the first time since 2007 was driven more by a desire to prevent the world’s second-largest economy from overheating than to increase the value of the yuan, he said. China is reluctant to allow its currency to appreciate, he said.
“We understand the Chinese position,” he said. “At the same time, it makes it harder for other countries to accept an appreciation because if you’re competing with China and China is not changing its exchange rate, you’re going to lose your competitiveness.”
Steps by countries like Brazil to stem capital inflows should be carried out in a prudent manner, Blanchard said. Brazil’s government has twice raised inflow taxes this month to protect exports from what Finance Minister Guido Mantega on Sept. 27 called a global currency war.
“There are contexts in which the capital flows may be so large that they create problems for countries,” he said. “In the case of Brazil, it is reasonable given the appreciation that they have seen to think about the use of, again, macro prudential measures, in addition to the capital controls that they have put in place.”
The appreciation of the Chilean peso has been “reasonable,” he said, adding that he is not an expert on the South American economy.
“If the appreciation became much stronger, then I would think that the central bank and the Ministry of Finance would think about the usual tools: more intervention, and perhaps macro prudential tools such as restrictions on, again, foreign currency borrowing,” Blanchard said.
Chile’s central bank last intervened in the currency market in 2008 by buying dollars in the spot market in $50 million daily tranches.