IMF Staff Sees Korea, Canada, Australia Well Placed for QE TaperSandrine Rastello
Canada, South Korea and Australia are among the countries best placed to weather any global market volatility from the withdrawal of U.S. monetary stimulus, according to the International Monetary Fund staff.
In a report released today, IMF staff gauged the likelihood of capital outflows in 13 major developed and emerging economies when the Federal Reserve starts paring its $85 billion in monthly assets purchases. The study also estimated the nations’ ability to withstand such volatility, looking at criteria such as currency reserves and reliance on foreign funding.
“Some capital flow reversal and higher borrowing costs are to be expected, but further volatility could emerge, even if exit is well managed,” the staff wrote in the report. “Affected countries should proactively take steps to enhance fundamentals, as this will provide more room for policy maneuver later.”
Bond prices slumped internationally and emerging-market stocks plunged after May 22, when Fed Chairman Ben S. Bernanke said for the first time the Fed could withdraw stimulus “in the next few meetings” so long as the economic outlook showed sustainable improvement. Those markets rebounded after the Fed decided last month to continue its quantitative-easing program.
The Institute of International Finance, a Washington-based industry group that represents global financial institutions, today cut its 2013 forecasts for capital inflows by $83 billion compared with a June prediction, to $1.06 trillion.
“Rising global interest rates in anticipation of Fed exit have compounded domestic weaknesses” in emerging markets, according to the institute.
The IMF report and its attached study both pre-date the Fed’s Sept. 18 announcement of its decision to refrain from tapering bond buying. Economists of the Washington-based fund stopped short of spelling out which nations, among the economies that don’t use unconventional monetary policies, face the greatest risks from the Fed’s exit.
In India, “in the event of significant outflows, overall policy room is limited,” they wrote in one of the reports. Indonesia’s long-term rates “are historically highly sensitive to U.S. monetary policy shocks,” according to the report. If faced with large outflows, Indonesia’s “fiscal policy space seems limited.”
While Mexico “can accommodate higher interest rates” if need be, such a move in South Africa “would further squeeze an economy that is growing below its potential,” the staff said in the report. China and Russia are less exposed because of their lower dependence on foreign funding, they said.
The report, called “Global Impact and Challenges of Unconventional Monetary Policies,” explores the dangers attached to the withdrawal of quantitative easing and what central banks from the U.K. to Japan can do to mitigate them.
“The path for future interest rates is clouded by uncertainty as to central banks’ policy plans,” the IMF economists wrote. Another possible source of volatility in long-term rates is the “somewhat greater challenges in controlling market interest rates” central banks face because of a large surplus of liquidity in the system, they wrote.
The report’s main advice to policy makers is to communicate, including on the principles guiding potential asset sales. Officials should make clear that increases in short-term policy rates will not come too fast and will reflect the economic outlook, they said.
Recent forward guidance by the Fed and the Bank of England “about economic thresholds has set the market up for incremental adjustments as the economy makes progress, although there is the risk that thresholds may need to be reconsidered as the recovery progresses,” they said.
Bernanke said in June he expected the Fed would complete its bond buying around mid-2014 with the jobless level at around 7 percent. Policy makers have pledged since December they won’t consider raising interest rates as long as the jobless rate exceeds 6.5 percent. Last month Bernanke downplayed the 7 percent threshold, saying unemployment “is not necessarily a great measure” of the job market.