G-20 Weighs Stimulus End as BRICS Plan $100 Billion Fund

Leaders of the world’s biggest economies grappled with fallout from potential stimulus exit as the BRICS countries said they will create a $100 billion pool of currency reserves to guard against financial shocks.

China will contribute $41 billion to the pool, with Russia, India and Brazil each adding $18 billion and South Africa providing $5 billion, according to a statement issued today at the Group of 20 summit in St. Petersburg, Russia. An exit from monetary-easing policies poses a major challenge for the world economy, Chinese Vice Finance Minister Zhu Guangyao told reporters today as the two-day forum opened.

Emerging markets, which helped pull the world out of a recession after the global financial crisis, now face 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 in its most recent quantitative easing program. The prospect of U.S. military strikes against Syria is also adding volatility as investors gauge whether oil flows from the region will be disrupted.

“The tapering of QE will dominate the agenda,” Victor Bark, who oversees about $2.8 billion as the head of asset management at Alfa Capital in Moscow, said by phone. “The U.S. won’t look at the situation in emerging markets -- they’ll act based on their own interests.”

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.

‘Negative Spillovers’

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.

“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.”

European Central Bank President Mario Draghi said today the monetary stance for the euro area will remain accommodative for as long as necessary, with the benchmark interest rate “at present or lower levels for an extended period of time.”

Lagging Behind

The MSCI Emerging Markets Index has lost 10 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.

“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 today 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.”

The U.S. should be mindful of a possible “very significant spillover effect,” said China’s Zhu, speaking through a translator. He called for greater coordination between nations and added that there’s no need for a rescue plan for developing countries.

Tapering Impact

“The emerging economies are slowing down and the tapering of advanced economies’ central banks certainly isn’t helping them,” Domenico Lombardi, the director of the Global Economy program at the Waterloo, Ontario-based Centre for International Governance Innovation, said in St. Petersburg. “That being said, there is very little that can be done.”

Emerging-market stocks rose to a two-week high, led by Indian lenders, and the rupee rallied after the nation’s new central bank governor outlined plans to bolster the financial industry. The MSCI Emerging Markets Index climbed 0.9 percent to 944.40 as of 8:40 p.m. in Moscow, poised for the highest level since Aug. 16.

“Some emerging-market economies are facing difficulties,” Zhu said. “Capital is flowing out of these countries and their currencies are under pressure of depreciation, and the major direct cause of such a phenomenon is the Fed’s announcement that it may exit its unconventional monetary policy. However, on the other hand, there are some structural problems with these emerging market economies as well.”

Rand, Rupee

South Africa’s rand has depreciated 17.5 percent against the dollar this year, the most among 24 emerging-market currencies tracked by Bloomberg. India’s rupee was second worst, weakening 17.4 percent, while the Chinese currency has strengthened 1.8 percent. The ruble has weakened against the dollar for seven straight months.

The BRICS countries haven’t agreed on measures to combat volatility on currency markets, said Ksenia Yudaeva, Russia’s G-20 sherpa. Brazil’s central bank said last month it isn’t coordinating interventions in currency markets with Russia, India and China after a media report said the group of developing nations would act jointly after a currency rout.

“For now we’re seeing risks linked by some to U.S. policies, but perhaps there are other reasons,” Yudaeva said today at a briefing, echoing Zhu’s comments. “The countries experiencing the biggest problems with capital outflow are those hobbled by the biggest problems with the fundamentals. They have issues with the balance of payments. That may be a result of U.S. actions as well as weakness of national economies.”

China, Russia

Emerging-market economic growth recovered in August from the first contraction since 2009 as business conditions improved in China and Russia, offsetting declines in Brazil and India, HSBC Holdings Plc said today, citing a survey of purchasing managers.

“One or two years ago, the emerging economies were complaining about appreciating exchange rates, now they’re complaining about the opposite,” Lombardi said. “It’s also up to the emerging economies to constantly upgrade the soundness of their macroeconomic framework.”

Policies of “giving out free money couldn’t continue forever,” Putin said, adding that the deployment of monetary stimulus helped support economic growth and cap volatility on financial markets.

“Some of the big emerging economies are now growing under their growth potential,” European Commission President Jose Barroso said. “But I’m confident that it will be possible to bring emerging economies back to their growth potential precisely if we act together and if they address also some of the problems they have identified themselves.”

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