The Financial Times and Bloomberg have reported that the IMF is intending to categorise a $3bn 2-year eurobond sold by Ukraine in December 2013 to a Russian sovereign wealth fund as ‘official’ government to government lending. This decision, if confirmed, will directly effect not only the implementation of Ukraine’s $40bn IMF-led bailout agreed in March 2015 but also Russia’s leverage over Kiev at a time when Russian-backed separatists are fighting the Ukrainian army and allied volunteer battalions in two breakaway oblasts in the east of the country.
Ukraine, the Financial Times argued, would be weakened by the IMF’s decision as it would compel it to service and repay the Russian bond because the IMF is not allowed to disburse funds to countries in arrears to other IMF member governments. Bloomberg argued that Ukraine’s remaining private western bondholders would have to shoulder an even greater burden of the IMF-imposed ‘debt operations’ making it more difficult for Ukraine to reach an agreement to reduce its private sovereign debt obligations.
However, the unusual structuring of the $3bn Russian eurobond and the new western-backed Ukrainian government’s policy of trying to detach itself from Russia suggest otherwise. Read more
Obituaries have been written for the World Bank following the arrival of China’s Asian Infrastructure Investment Bank (AIIB), the implied question being whether the US remains willing and able to lead the global economic governance system. Yet the other Washington-based Bretton Woods institution, the International Monetary Fund, reveals a different story. It appears to be on the verge of a third epoch in which it is set to become indispensable, ushering in the global economic reforms now considered necessary in the ‘new mediocre’. Read more
A lot has been made of the IMF’s recent warning that potential growth has fallen dramatically in emerging markets (EMs). Many have correctly pointed out that potential output is expected to fall from to a yearly average of 5.2 per cent in the 2015-20 period while developed markets (DMs) are expected to see potential growth increase to 1.6 per cent. This has, in turn, caused renewed cries of concern about emerging economies. It is, however, possible to draw a dramatically different conclusion using the same data set. The IMF predicts that the growth differential between EMs and DMs will be higher in the 2015-20 period than it was in 2001-07, a period when EMs were very much in favour. Read more
So, how would you go about bailing out a war-zone? The IMF’s rescue plan for Ukraine, agreed by the fund’s executive board last week, has to grapple with an extraordinary combination of problems. On top of the usual party pack of issues endured by IMF borrowers – a collapsing currency, a large debt burden, a corrupt and sclerotic economy – Ukraine faces the unusual challenge of a belligerent nuclear-armed neighbour fomenting a civil war.
In this context, the critical question of whether to restructure private sector debt becomes an unusual one. The IMF made obvious mistakes in previous crisis countries such as Argentina and Greece, where debt restructurings were delayed until the situation had gone critical. This experience suggests a rapid early reduction in net present value, including a cut in face value if necessary, to tip debt dynamics towards stability. But where there is a large and completely uncontrollable risk that might instantly change the situation, there is a strong case for giving Ukraine medium-term breathing space rather than a once-and-for-all write-off. Read more
By Greg Konieczny of Templeton Emerging Markets Group
Following presidential elections in Romania last month and the surprising but positive victory of Klaus Iohannis, there was one key development that we, as a major investor in the market, really wanted to see: namely, for the government to pledge to reduce its budget deficit and commit to a new loan agreement with the IMF in 2015.
If an agreement is signed following negotiations between the government and the Fund this week, it will further prompt Romania to implement reforms and increase fiscal predictability. Read more
Serbia’s long-awaited new deal with the IMF should bolster investor confidence in the country but the substantial fiscal tightening that the Fund has prescribed will prove politically difficult to implement.
On November 20, the Fund announced a new 36-month standby agreement for Serbia worth around €1bn, with the package expected to be in place from January 1, pending final approval. The deal foresees Serbia reducing its budget deficit from 8 per cent of GDP in 2014 to between 4 and 4.25 per cent by 2016. Dusan Vujovic, Serbia’s finance minister, said this would require savings of around €1.3bn to €1.4bn. Read more
A story told in the Bank of England goes like this. Shortly after the fall of the Berlin Wall, a group of Russian central bankers with solid grounding in Marxist economics came to London for a training course at the BoE. They patiently absorbed the theoretical run-down of supply and demand curves and how prices were determined, and then asked “But who sets the price?” A world without a state official with a clipboard announcing the cost of everything was unthinkable. Eventually the exasperated BoE economists took them on a trip to Smithfield meat market in the City of London to see the magic in action.
After the Wall came down in 1989 – triggered by a single unguarded remark by an East German Politburo member in a press conference – the speed and size of changes in the economies of central and east European (CEE) and the former Soviet Union (FSU) were unprecedented since the Second World War. Twenty-five years later, with currency crises wracking Ukraine and Russia, and FSU economies like Belarus and Moldova struggling to emerge from the Soviet era, the dispersion of performance has been dramatic. Read more
By George Magnus
Serial disappointments in emerging country growth rates since 2011 has forced the International Monetary Fund (IMF) to cut its five-year-ahead forecasts for a group of 153 emerging and low-income developing countries on six occasions since late 2011 (see chart).
However, in its latest World Economic Outlook, the IMF again assumes that current disappointments will give way to restored equilibrium growth rates over the next five years. But what if there is no equilibrium and emerging market (EM) growth continues to disappoint? Read more
When a country cuts power to its aluminium smelters so its people can watch the World Cup on TV, you have to conclude that its economic policy isn’t all about investing for the future.
Ghana this week called in the International Monetary Fund after a depreciation in its currency threatened to turn into a rout. The episode is an excellent illustration of the injunction to be careful what you wish for, in this case Ghana’s discovery of oil. Its fellow minerals exporter, copper-rich Zambia, has also called in the IMF.
The two nations have become object lessons in how easy outside financing and high but volatile export prices give countries enough rope to strangle themselves. Their experience is unlikely to be a bad as similar countries in previous decades, but it still represents another chapter in the sad history of resource-dependent economies going wrong. Read more
When Zambia last week approached the International Monetary Fund for financial help, another cash-strapped African country was surely watching: Ghana.
Lusaka and Accra face similar problems: runaway fiscal deficits – the result of electorally-driven increases in public sector salaries – and a swelling current account deficit that is pressuring the exchange rate.
The market response to Zambia’s request should convince Ghana to seek help, too. Read more
Latin America has been one of the great beneficiaries of the commodities supercycle of recent years. With the peak in that boom behind us, what is Latin America to do?
Structural reform, says Alejandro Werner, Western Hemisphere director at the IMF. As he told beyondbrics:
High growth in the last 10 years had a side effect – maybe [Latin America] didn’t push as fast as expected in structural reforms.
Welcome to Ukraine. You’re running a rickety business, mainly cash-in-hand, that has a big gas bill and is losing money. Your shady Uncle Vlad says he will give you cheaper gas, lend you money on suspiciously favourable terms, and perhaps see his way to giving your workers an extra something in their pay packets. In return, all you have to do is back him up in family disputes in perpetuity. Meanwhile Christine, your steely-eyed bank manager, wants you to turn down the thermostat in your offices, lay off half your staff and stop fiddling the books.
The International Monetary Fund is looking at sovereign debt restructuring, worried that it is bailing out private creditors. Gabriel Sterne, an economist at Exotix, explains to Fast FT deputy editor Robin Wigglesworth why the proposal for automatic bail-ins would not be wise.
Anyone reading the IMF’s latest update to its World Economic Outlook might come away worried about a repeat of the emerging market ructions in 2013 over the US scaling back its asset buying programme (aka tapering).
The Fund says that the world economy is “Not yet out of the woods”, and suggests that, for EMs, once the US Federal Reserve starts tapering in 2014, “portfolio shifts and some capital outflows are likely.” Read more
Lagarde with Henry Rotich, Kenyan finance minister
IMF boss Christine Lagarde concludes a trip to Africa trip on Friday, continuing her tradition of starting the new year visiting one of the world’s fastest growing continents. For 2014, she chose Kenya and Mali, two very different economies on either side of Africa. Read more
Another week, another barrage of criticism for Thailand’s massive rice subsidy scheme.
This time the attack on a programme that is costing the government billions of dollars a year and adding to worries about the country’s economy is delivered diplomatically, but none the less forcefully, by the International Monetary Fund. Read more
Indonesia, the Philippines, Malaysia and Thailand are on the face of it a relatively homogeneous, integrated group of nations with similar trading partners. So why did the first two emerge from the 2008 financial crisis in a much better shape than the latter?
A working paper from the IMF concludes that it was because Indonesia and the Philippines were less open to trade and had greater fiscal stimuli. Read more
The IMF may have outlined the risks to sub-Saharan Africa from tighter monetary policy in the US and other shocks (read the FT’s Javier Blas for the full story) – but as the report makes clear, it’s not just the US that has an impact on Africa’s fortunes.
There’s China too, of course. In a section titled Africa’s Rising Exposure to China: How Large Are Spillovers through Trade?, the Fund looks to quantify and group the countries most exposed to a China slowdown. Read more
A landmark deal with Kosovo, a $3bn loan package from a new Emirati ally, a high-profile anti-corruption drive: Serbia has been filled with a new boldness in recent times.
It continued on Friday as the National Bank of Serbia cut its policy interest rate by half a point to 10.5 per cent, more than the expected quarter-point cut. The bank had held steady for the previous three months following reductions totalling 75 bp in May and June, as inflation fell from double figures. Read more
By Dalibor Rohac of the Cato Institute
In the weeks leading to the Annual Meetings of the International Monetary Fund (IMF) and the World Bank last weekend, Christine Lagarde, the managing director of the Fund, has been making a lot of headlines. She announced that the IMF would push for more gender equality in labour markets around the world, suggested that the IMF could help protect the planet from environmental damage by promoting reforms of energy subsidies, and urged European countries to move towards a fiscal union in order to help eurozone limit the severity of future financial crises.
That is a lot of ground to cover. While each of these proposals should be discussed on its own merit, jointly they are symptomatic of the spectacular mission creep that characterises the past 40 years of the organisation’s existence. Read more