Global finance chiefs will use weekend talks to recommend monetary policy is carefully calibrated and clearly communicated as they try to settle a spat between the U.S. and emerging markets over the wind-down of Federal Reserve stimulus.
The advice is contained in a draft communique for a meeting of Group of 20 policy makers scheduled to start tomorrow in Sydney, according to an official from a G-20 government involved in discussions of the statement, who asked not to be identified because deliberations aren’t public.
The run-up to the G-20’s first meeting of the year has been marked by criticism from emerging markets, including India and South Africa, that the Fed hasn’t paid enough attention to the international fallout from its decision to taper bond buying. Emerging-market stocks and currencies fell since the pullback was announced in December as investors turned more risk averse and punished economies with flaws such as large current-account deficits or political discord.
“The interaction between the Fed’s tapering and the emerging markets’ need to fund themselves is going to be something we’re going to have to live with,” said Adam Cole, head of global currency strategy at RBC Europe Ltd. in London.
With the MSCI Emerging Markets Index down about 5 percent this year and developing-nation currencies experiencing the worst annual start since 2010, the G-20’s finance ministers and central bankers also will warn recent market volatility poses a threat to a strengthening economic recovery, the official said.
Emerging economies are worst hit by tapering and want central bank coordination to be reflected in the communique, a different official from a G-20 nation involved in discussions on the communique said separately. G-20 officials are discussing a mechanism for coordination that may be reflected in the communique, the official said, asking not to be identified because the deliberations weren’t public.
The International Monetary Fund this week identified prolonged market turmoil in developing nations and deflation in the euro area as potential threats to a global economy it currently expects to grow 3.7 percent this year. That would be the most since 2011.
“For emerging nations, they have faced weaker currencies, and sudden capital outflows due to their short-term funding,” Japanese Finance Minister Taro Aso said today at a press conference in Tokyo. “It is important that emerging nations make efforts themselves to fix these issues” like high inflation and current account deficits, he said.
South Korean Finance Minister Hyun Oh Seok said global coordination of policies will be more important as the U.S. tapers its asset purchases.
“The measures should be calibrated, well communicated and taken in an orderly manner,” Hyun said in an interview in Sydney today. “Emerging-market economies should build their resilience to external shocks.”
The G-20 communique also is likely to include a target for world economic expansion, one of the officials said. That would be a victory for host Australia, which proposed growth goals in the face of skepticism from Germany.
“It is a good idea” to set a higher growth target, IMF Managing Director Christine Lagarde told Australian Broadcasting Corp.’s Q&A program yesterday. “If the right policies were decided in all these countries, there could be improved growth going forward.”
Fed Chair Janet Yellen will make her debut on the international stage at the G-20 meeting since taking office this month. She does so as foreign counterparts including Reserve Bank of India Governor Raghuram Rajan warn of a breakdown in global policy coordination following the Fed’s decision in December to begin tapering its bond-buying and subsequent paring of monthly asset purchases to $65 billion from $85 billion.
The Fed received backing from U.K. Chancellor of the Exchequer George Osborne today.
“I do remember sitting around a G-20 table a couple of years ago: some of the same countries that are now complaining about the tapering off of QE were the same countries complaining about the introduction of another round of QE,” he said. “I think it is another example of where we should all make sure we put our own houses in order.”
The IMF said this week that better coordination between central banks over their exit from unconventional monetary stimulus, combined with steps such as infrastructure investment, changes to labor markets, and policies to boost domestic demand in export countries could raise the world’s output by 0.5 percentage point a year. That would add $2.25 trillion to the size of the global economy by 2018, it said.
Central banks need to cooperate and be “mindful of what the consequences will be not just at home, where they will do the tapering, but elsewhere in the world, where we have seen some volatility,” Lagarde said.
Yellen last week said the U.S. central bank sets policy “to pursue our goals that Congress has assigned,” which are full employment and low inflation at home.
Australia Treasurer Joe Hockey yesterday said the Fed needs to be aware of international implications as it withdraws stimulus, yet it ultimately has to “operate in a manner that is consistent with its domestic mandate.”
The World Bank also gave the Fed a reprieve, saying in a report this week that while the turmoil in emerging markets “coincided with the further unwinding of the Federal Reserve’s quantitative easing program, it does not appear to have been caused by it.” It forecast net private capital inflows into developing economies to slow to $1.065 trillion this year from $1.078 trillion last year.
While declining to comment on the Fed, U.S. Treasury Secretary Jacob J. Lew said in a CNN interview released yesterday that investors are differentiating between emerging markets and supporting those which have “put their fiscal house in order” and acted to reform energy and labor markets.
“Countries that have done the tough things are doing better than countries that haven’t,” Lew said. “So one of the conversations will be about making sure that there’s continued focus on each country taking responsibility for doing what it needs to make sure that its economy is strong.”