Monthly publication of short aticles on current international monetary affairs including on the IMF, exchange rate and international capital markets developments, central banks' international reserves, key emerging markets economic developments.

February 2016

Brexit and emerging markets

The G20 finance ministers and central bank governments declared on 27 February that the U.K. leaving the E.U. would be a “shock” for the world economy. It is naturally difficult to assess the implication of a Brexit. Attention is focused mostly on the U.K. and the E.U. but emerging markets may be relative winners. [...]

Intra-emerging markets growth

The gloom about emerging markets does not seem to be reflected in recent economic projections. While by most accounts, emerging markets seem in a tailspin, significant differences in economic performance tell a different story. The G20 finance minister and central bank governor communique of 27 February underlines that “growth in key emerging markets economies remains strong,” based on IMF data. However, it depends on the region. [...]

G20 communique mixed messages

The G20 may offer a cosier environment for discussions than the IMF. This is probably the main reason why it exists in the first place. The list of participants at finance minister and central bank governors is identical to countries’ representation at the IMF. It means that any message the IMF gives to the G20 and vice versa, is identical to the messages exchanged in Washington. It naturally leads to repeated duplication of messages. The lack of actual coordination suggests it may also lead to obfuscation. [...]

G20 and the IMF

The G20 finance ministers and central bank governors communique of 27 February provides a long to-do-list for the IMF. This is somewhat problematic given that the G20 lacks the legitimacy—the G20 remains an ad hoc body while the IMF is based on an international treaty—of the IMF. At the same time, the voting power of the G20 at the IMF ensures that the G20 can get what it wants but not always. [...]

January 2016

China's G20 presidency

China underwhelmed during the initial phase of its G20 presidency. The presidency’s priorities remain obscure and communication of its intentions insufficient. There was an expectation that China would propel the G20 forward. At a time when China has become so dominant a force in the international economy, the G20 presidency could have offered the perfect opportunity to demonstrate international leadership with both ideas and actions. [...]

IMF quota reform

The ratification by the U.S. Congress of the IMF 2010 quota reform on 18 December was a milestone in U.S. multilateral engagement. It remained largely unnoticed. The reform provides for a significant shift of voting power to emerging markets and bolsters the IMF’s financial resources. Implementation of the reform was long seen as critical to allow the IMF to restore its legitimacy and effectiveness as a multilateral organisation. [...]

The next IMF Managing Director

At Davos on 22 January, Christine Lagarde announced that she is ready to serve a second term as IMF Managing Director when her term ends in early July. She received instant support from a number of key countries. Her candidacy was quickly considered a shoo-in. Indeed, she will be very difficult to match. But questions remain.[...]

December 2015

Paris Climate Summit—Climate change and economic policy frameworks: 2°C for 2%

The 2015 United Nations Climate Change Conference kicked-off in Paris on 30 November. The objective of the conference is to achieve a binding agreement on climate change mitigating policies. Policy makers like to associate themselves with the need to combat climate change. But as long as climate change targets do not lead to a reordering of economic policy objectives and augmentations of existing economic policy frameworks, they will remain simple add-ons and most likely be subordinated to what policy makers still seem to care about most namely employment and price stability. The concern naturally is not how climate change can also lead to high quality inclusive economic growth, it is when it does not. [...]

Climate change—What the IMF can do

The IMF states it is not an environmental organisation. It acknowledges that climate change poses “worrying tail risks” and promotes carbon pricing as the “centrepiece of climate mitigation efforts.” The former suggests that the IMF fails to recognise the essence of structural risks from climate change. The latter reveals that the IMF may not take due regard of measures it itself controls and can implement immediately. By stating that it is not an environmental organisation, the IMF also insinuates that climate change is exogenous to economic policy. The Fund thus risks missing an important opportunity to make climate change an integral part of the international economic policy dialogue. Meanwhile, green GDP accounting, the IMF can do today. [...]

SDR decision: China’s international economic policy leadership

The IMF concluded on 30 November its quinquennial review of the Special Drawing Right (SDR) valuation. The IMF affirmed inclusion of the renminbi in the SDR currency basket. It is the first time there is a net addition of a currency to the basket. It demonstrates that China is interested in promoting the SDR and as such may mark a new beginning for the IMF’s ill-fated reserve asset. More importantly, it shows that China can lead on international monetary issues. [...]

Hong Kong Dollar peg revisited

The renminbi SDR inclusion may give rise to rethinking the Hong Kong dollar peg. The peg seems odd increasingly given the economic ties between China and Hong Kong. The renmimbi inclusion in the SDR basket may offer new legitimacy to the repeatedly made claim that Greater China’s currency regimes would benefit from change. A plausible outcome would be that the two other Chinese currencies, leaving Taiwan (Province of China) out for illustrative purposes, the Hong Kong dollar (HKD) and the Macau pataca (MOP), will be pegged to the renminbi (RMB). [...]

November 2015

SDR valuation review decision

The SDR valuation review is now scheduled to be completed on 30 November and as expected is to provide for inclusion of the renminbi. On 13 November, the IMF issued a press release indicating that the Managing Director supports inclusion of the renminbi in the SDR basket. The addition of the renminbi would be the first time the SDR basket will see a net increase in the number of currencies and may signal new momentum around the IMF’s reserve asset. However, the review also reveals the contentiousness of the SDR valuation framework. [...]

UBS European Conference 2015—Main impressions

The UBS European Conference 10-11 November, one of the leading investor conferences in London, was notable for its topics and absence thereof. Given the nature of the conference, there were plenty of sessions on macroeconomic and financial topics, sessions on growth and innovation, on Europe with one session on the U.K.’s membership in the European Union, one on emerging markets and two on China. There were no sessions on climate change, international security or on immigration. [...]

G20 Summit Antalya

The G20 Communiqué of 16 November was bland affirming that the G20 finds it difficult to reach consensus on critical economic policy, energy and international security measures. Turkey’s G20 Presidency wanted to focus on implementation and rather quickly it was seen as merely a prelude to the Chinese G20 Presidency. Accordingly, nothing special was contemplated or achieved. This seems like a missed opportunity. Turkey would have been in the credible position to guide concrete actions to confront a sluggish EU as an EU peripheral country and the largest EU refugees crises by virtue of being at the centre of it. The former would have offered valuable insight into the geography of economic crises and the second tackling the refugee crisis as an international and not a bilateral effort. Neither featured among Turkey's G20 Presidency priorities. [...]

October 2015

Impressions and main takeaways from the IMF Annual Meetings in Lima 9-11 October

Themes: Emerging markets, China, Effect of quantitative easing, Inequality and economic growth, Monetary policy frameworks, Climate change, IMF SDR, IMF governance, Social peace, International migration crisis, Policy normalisation [...]

September 2015

International reserves: The end of the dollar glut?

China's foreign exchange reserves declined in August by US$94 billion to US$3,600 billion. It serves as a reminder that after years of massive reserve accumulation, recent data seem to point to stalling reserves. This seems consistent with the overall decline in external imbalances and in particular the shrinking of the U.S. current account deficit. The stabilisation of international reserves should be seen as a good thing. Yet, at the same time it may signal an end to abundant international liquidity. A new scramble for international liquidity may have started.[...]

Does China’s slowdown matter for the rest of the world?

China’s GDP growth slowdown is being announced as the next big risk for the world economy. Recent economic developments appear to confirm that China will continue to decelerate. However, it is not clear why a slower growing China poses a problem at all for the rest of the world. It is China’s current account that matters, that is whether China adds to or withdraws resources from the rest of the world.[...] 

G20: Do exchange rates reflect fundamentals?

The relationship between fundamentals and the exchange rate has been lose at best. The most important international price, the eurodollar exchange rate, has shown remarkable volatility despite near convergence of inflation rates in the U.S. and Euro Area. Yet, the G20 Finance Ministers Communiqué of 5 September stressed the G20’s “commitment to more market-determined exchange rate system and exchange rate flexibility to reflect underlying fundamentals.” Prima facie evidence suggests that the poor correlation between fundamentals and the exchange rate makes the G20’s call seems wrong footed at best and bad policy advice at worst.[...]

August 2015

The August Newsletter offers three vacation-light notes on commonly used but as shall be argued here inadequate investment terms and concepts

Emerging markets

The meaning of the label emerging markets has become increasingly controversial. Some argue it has become obsolete. It seems fair to argue that it has. But replacing it with something better is not obvious. [...]

Renminbi versus dollar

The debate about international currency diversification has focused predominantly on the renminbi. Speculations seem rife as to when the renminbi will replace the dollar as the dominant reserve currency. The fact that such speculation is taking place is itself indicative how much the international economy has changed. At the same time it serves as a reminder how little has changed. [...] 

Lender of last resort

The significant purchases of government securities by the Bank of England, Bank of Japan and Federal Reserve have financed directly government debt and indirectly lowered interest rates on government debt. This seems to defy conventional wisdom that central banks should not finance their governments and/or not offer emergency liquidity unconditionally. New central banking rules seem to be required. [...]

July 2015

The institutional dimension of Greece’s default to the IMF

Greece’s default to the IMF marks the low point for the IMF’s engagement in Greece. It exemplifies unambiguously the failure of Greece’s IMF-supported arrangement and now leaves the IMF facing its single biggest arrears case. Greece’s default has caused severe reputational damage for the IMF and is expected to call into question the financial safeguards at the IMF and the independence of the IMF and the IMF Managing Director. It may lead to calls for an overhaul of the very foundations of the IMF. [...]

IMF arrears

Greece missed its payment deadline on 30 June and is now in arrears to the IMF. While Greece’s arrears are unlikely to cause serious financial damage to the IMF, the IMF looks ill prepared to handle a significant increase in arrears. [...]

SDR basket review: Beyond the renminbi

The SDR quinquennial valuation review timetable has slipped. This seems to reflect a good thing. Initial consideration for the SDR valuation review may not have taken into account possible complications arising from an inclusion of additional currencies into the SDR basket. The best approach would still be to simply change the SDR basket inclusion criteria. [...]

Foreign exchange reserves: Euro blues

Recent data on currency composition of central banks’ foreign exchange holdings affirms the continued decline of the share of the euro.[...]

June 2015

The June 2015 Newsletter focuses on international governance in relation to Greece, FIFA and the G7 highlighting the importance of adequate governance arrangements.

IMF, Greece and international governance

Greece is on the brink of default. This is largely its own making. Greece, the IMF and EU/ECB do not seem able to agree on conditions sufficient to resume Greece's IMF-supported adjustment programme. Less clear is, who actually decides what conditions need to be met and how. The governance guiding the Greek economic adjustment programme has significantly weakened Greece and the IMF. [...]

FIFA and international governance

The corruption and other allegations against the Fédération Internationale de Football Association (FIFA) serve as a reminder of the importance of effective international governance arrangements. While the indictments brought against individual FIFA officials with charges of racketeering, wire fraud and money laundering conspiracies, seem to point to severe failures of internal controls and compliance, FIFA’s governance structure may lend itself unduly to misconduct. [...]

G7 and international governance

The G7 summit held in Germany on 7-8 June feels like an arrangement from the past. While the G7 has undoubtedly still powerful countries in its midst, it also suffers from its weakling members. More importantly, the G7 excludes many countries that matter considerably today. Even more importantly, there is little appetite for policy coordination generally. This should not mean that there is no need for the G7 to meet but it raises the question of whether such meeting matters for the rest of the world or crucially what is the international dimension of the G7 summit? [...]

May 2015

IMF SDR valuation review

The IMF is due to hold the first reading of the 2015 SDR valuation review during May. The five-yearly SDR review appears to be a more interesting affair than usual. The inclusion of the renminbi into the SDR basket is being considered in earnest. It would be the first meaningful innovation of the SDR since the early 1980s. [...]

Economic forecast

The IMF, similar to most others, has often been wrong, missed major turning points and has now recently overestimated growth continuously. Economic projections should therefore be handled with care. [...]

Central bank lending to governments

The start of large-scale government debt purchases by the ECB in March serves as a reminder how important central banks have become in bankrolling governments. [...]

CIGI T20│tepav Conference: Prioritizing international monetary and financial corporation, Ottawa 3-5 May—Summing-up

The conference aimed to provide input for the G20 agenda focusing on international financial, regulatory and environmental issues with a broad based participation of representatives from governments and central banks, IMF, academia and think tanks and former Prime Minister of Canada Paul Martin. [...]

Country vulnerability indicator

The slowdown in global economic growth has revealed countries’ underlying vulnerabilities. The country vulnerability indicator, a simple linear combination of economic growth, inflation, fiscal deficit, government debt and current account balance, uses the latest IMF World Economic data to show level and change of economic vulnerabilities for the 50 largest economies. [...]

April 2015

Greece risks default to the IMF

The Greek government affirmed over the weekend that it will remain current on its obligations to the IMF. However, the possibility of a default to the IMF remains if no agreement can be reached on needed measures to extend its existing borrowing arrangements.

Economic policy autonomy and WIMP countries

The ability of countries to conduct economic policies without immediate regard of external constraints has remained the privilege of a few. It may represent one of the most important features of a country and one that seems to divide the international economy like no other.

ECB: Quantitative easing and eurodollar

The euro has depreciated about 20 percent against the dollar since mid-2014. The significant depreciation seems inconsistent with the interaction of price and quantity effects of quantitative easing. The euro looks oversold.

International portfolio investments

International portfolio investments have expanded slightly through 2014. The IMF’s latest Coordinated Portfolio Investment Survey (CPIS) shows that total cross-border portfolio investments in equity and debt securities in June 2014 stood at US$44.5 trillion (58 percent of world GDP) compared with US$44.1 trillion at end-2013 (59 percent of world GDP).

International reserve allocation by currency

The latest IMF survey on currency composition of official foreign exchange reserves (COFER) shows broad maintenance of dominant allocations by currency.