Sorry IMF, emerging markets won’t save us
In its recent World Economic Outlook, the International Monetary Fund (IMF) is hoping that a stagnating world economy will receive a much-needed boost from an emerging-market economic rebound in the second half of the year.
Sadly, there are at least two reasons to think that the IMF’s optimism about emerging markets’ economic prospects will prove to be misplaced.
{mosads}The first is that the IMF is pinning its hopes on the unrealistic expectation of an early resolution of the Argentine and Turkish currency crises as underlined by a decline in these two countries’ currencies by around 50 percent and 33 percent, respectively, over the past year.
An early end to the Argentine currency crisis appears to be highly improbable ahead of that country’s October presidential election that could see the return of the gross economic mismanagement of a Cristina Fernandez de Kirchner administration.
This would seem to be particularly the case as a deepening economic recession and an acceleration in inflation to 50 percent are causing President Macri’s popularity at the polls to plummet like a stone.
An early end to the Turkish currency crisis also seems to be unlikely unless Turkey were to restore its economic policy credibility by approaching the IMF for much-needed financial support.
That seems unlikely anytime soon so long as Turkey remains at loggerheads with the United States, whose political support would be needed to unlock IMF resources.
It would also seem unlikely so long as Turkish President Erdogan continues to rant against interest rate hikes and against the need for much-needed budget belt-tightening to help stabilize the currency.
The second reason for thinking that an early emerging-market economic rebound is unlikely is because of the gathering economic storm clouds over the Brazilian economy.
Brazil is of more concern than Argentina and Turkey because its $2-trillion economy is approximately double the combined size of Argentina’s and Turkey’s.
The first 100 days of the Bolsonaro administration seem to be dashing earlier investor hopes that at last Brazil would reform its economy in general and its pension system in particular.
It is increasingly apparent that a highly divisive President Bolsonaro does not seem to grasp the desperate need for coalition building in Brazil’s unruly Congress of 30 political parties. This is especially the case at a time that his own party commands only 10 percent of the seats in Congress.
Further clouding investor confidence in Brazil is the fact that its public finances appear to be on an unsustainable path. With a general government deficit in excess of 7 percent of GDP, the IMF estimates that Brazil’s public debt is presently on a path to reach almost 100 percent of GDP by 2024.
As such, in addition to pension reform, whose budget benefits would largely be reaped in the long-run, Brazil needs immediate fiscal adjustment if it is to reduce its vulnerability to less benign global financial market conditions than presently prevail.
All of this would suggest that global policymakers would be making a big mistake to pin their hopes for a revival in the world economy thanks to an early rebound in the emerging-market economies.
It would also underline the urgency for an early resolution of the U.S.-China trade dispute and the ill-advisedness of the Trump administration thinking about opening up another front in the world trade war by going ahead with a proposed import tariff on European and Japanese automobiles.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.