G-20 Faces Growth Threats as Syria Adds to QE Exit Risks

Leaders from the Group of 20 nations said stimulus pullback in developed countries heightens the threat of volatile capital movement that’s hurting emerging economies as the Syrian conflict shadowed the two-day summit.

“Our central banks have committed that future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated,” the Group of 20 said in a communique issued after the two-day forum in St. Petersburg, Russia. “We reiterate that excess volatility of financial flows and disorderly movements in exchange rates can have adverse implications for economic and financial stability, as observed recently in some emerging markets.”

Emerging markets, which helped pull the world out of a recession after the global financial crisis, face heightened vulnerabilities after an exodus of cash and sliding currencies in anticipation of the U.S. Federal Reserve’s eventual tapering of its $85 billion in monthly bond purchases. Leaders from emerging and advanced nations were at odds during discussions over stimulus exit in the U.S., South Korea’s Finance Ministry said in an e-mailed statement.

The BRICS countries pledged yesterday in St. Petersburg to create a $100 billion pool of currency reserves to guard against shocks even as Russia said U.S. President Barack Obama sought to ease concern about an abrupt pullback of monetary stimulus.

Monetary ‘Normalization’

“We recognize that strengthened and sustained growth will be accompanied by an eventual transition toward the normalization of monetary policies,” the G-20 said in the communique. “Sound macroeconomic policies, structural reforms and strong prudential frameworks will help address an increase in volatility. We will continue to monitor financial market conditions carefully.”

After the rift over implications of the U.S. stimulus pullback, advanced economies in the G-20 agreed to carefully coordinate policies when making any changes in their monetary stance, according to South Korea’s Finance Ministry.

The prospect of U.S. military strikes against Syria is also adding to volatility as investors gauge whether oil flows from the region will be disrupted. Chinese and Italian officials warned that military intervention in Syria would risk harming the global economy.

Destabilization, Escalation

“Any political destabilization, an escalation of political tension always affects the mentality of investors,” Andrey Kostin, chairman of state-run VTB Group, Russia’s second-biggest bank, said today in St. Petersburg. “Investors are always afraid of war.”

An exit from monetary-easing policies poses a major challenge for the world economy, Chinese Vice Finance Minister Zhu Guangyao told reporters yesterday as the two-day forum opened. Developed economies are turning into global growth engines as some emerging-market counterparts decelerate, the International Monetary Fund said in a report for G-20 leaders.

“New risks have emerged in recent months,” Russian President Vladimir Putin said in opening remarks at the forum. “Our partners have started to exit unconventional financial and economic policies. That can take a toll on key global risks and impact economies of other countries.”

Obama held talks with Chinese President Xi Jinping on the sidelines of the summit today, with the U.S. leader saying the world’s two biggest economies have a mutual interest in taking on global challenges, such as North Korea’s nuclear and missile programs. The U.S. and China have reached a consensus in several areas, such as military-to-military cooperation, as both nations maintain “a sound momentum for development,” Xi said.

Syrian Action

Obama, who has asked Congress to endorse a punitive strike on Syrian President Bashar al-Assad’s forces after an alleged chemical attack on civilians, is trying to enlist international support at the G-20 meeting. Italy and Germany have joined Russia and China in insisting they won’t support military intervention without United Nations Security Council approval.

The G-20’s economic discussions haven’t been dwarfed by developments in Syria because of the strong “momentum for a commitment to jobs and growth agenda,” Australian Foreign Minister Bob Carr said in an interview in St. Petersburg today.

Italian Prime Minister Enrico Letta said any operation against Syria would cause volatility in financial markets.

Oil Spikes

“If there were a conflict, of course we would be very concerned about spikes in oil prices,” World Bank President Jim Kim in an interview with Bloomberg Television’s Hans Nichols. “What we learned from 2007 and 2008 is when oil prices go up, the entire chain is affected, including for example food prices.”

Brent may rise to $120-$125 a barrel if the U.S. and allies begin military action in Syria and may “spike briefly” to $150 if a U.S.-led attack on Syria sparks further conflict in the Middle East and supply disruptions, Michael Wittner, Societe Generale SA’s New York-based head of oil market research, said in a report on Aug. 30.

Capital Economics Ltd. estimates that in the worst-case scenario, a jump to $150 a barrel, would threaten “stagnation” by knocking 1 percentage point off international expansion.

BRICS nations discussed the risk posed by a Syrian strike on the sidelines of the G-20 summit, Putin’s spokesman Dmitry Peskov said. They agreed that it would lead to an “extraordinary negative influence on the economy,” he said.

Syrian Fallout

China’s Zhu said his country is in consultations with the IMF on the fallout from Syria and cited the Washington-based lender’s forecasts that a $10 per barrel increase in oil would wipe a quarter percentage point off global growth.

German Chancellor Angela Merkel urged central banks to curb expansive policies, saying that scaling back monetary stimulus will be “necessary, step-by-step.” The BRICS countries, which also agreed to seed a new development bank with $50 billion of capital, are seeking a shield against “unintended negative spillovers” from unconventional monetary policies in developed economies, according to the statement.

Obama told the G-20 leaders that any pullback would be gradual, Russian Finance Minister Anton Siluanov told reporters.

“It was said that such scaling back will be implemented within reasonable limits,” Siluanov said. “That’s absolutely right. Most countries with developing economies spoke out from the point of view of the necessity of conducting balanced steps in reducing these policies.”

Fed Independence

Obama doesn’t set the Fed’s policy or make decisions for the U.S. central bank, Ben Rhodes, Obama’s deputy national security adviser, said yesterday.

The MSCI Emerging Markets Index has lost 9.4 percent this year, compared with a 12 percent gain in the MSCI World Index, amid speculation the Fed will start trimming its bond-buying program after a meeting this month. The developing-nation index trades at 10.1 times projected 12-month earnings, trailing the MSCI World’s 13.7 times, data compiled by Bloomberg show.

Emerging-market stocks rose, heading for the biggest weekly advance since July. The MSCI Emerging Markets Index climbed 0.9 percent to 955.89 at 5:31 pm. in Moscow. The gauge has gained 2.1 percent this week on signs the global economy is improving.

“Most of the countries among emerging markets are facing the problem of capital outflow because of tapering of QE,” Indonesian Finance Minister Chatib Basri said in an interview yesterday in St. Petersburg. “So the issue is more how do we adjust. And I think the role of the G-20 is very important here because the leaders can also communicate about the plan.”

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