Geopolitical tension casts pall over IMF meeting

Geopolitical tension casts pall over IMF meeting

Financial leaders fear unity to tackle escalating emerging market woes is lacking

Finance ministers and central bank governors brushed aside the global rout in stock markets this week at the annual IMF meetings in Bali, Indonesia, but the event was overshadowed by geopolitical tension and few were confident of calmer waters ahead.

Although the global economy is strong, there were fears that financing problems in emerging markets were spreading from specific countries to become generalised capital flight and that global institutions did not have the cohesiveness to deal with problems as they arise.

Christine Lagarde, managing director of the IMF pleaded for nations to “sail together” to keep the global economy on track, but there were many signs that co-ordinated action is becoming more difficult.

Joko Widodo, Indonesia’s president, warned that “relations between the major economies are looking more and more like the Game of Thrones” with a “tragic price” ready to be paid by all.

One shock this week was that the US president was willing to publicly criticise an “out of control” Federal Reserve for the falls in equity prices, but there was also concern that many other possible triggers existed for what Mario Draghi, president of the European Central Bank, said could be a “snap back” in asset prices and a sharp increase in interest rates.

With the world’s two largest economies slapping tariffs on $360bn of goods so far this year, and more to possibly come in the next few months, IMF and World Bank officials, as well as senior officials from many countries, pleaded for Washington and Beijing to de-escalate and reach a truce.

There was little concrete progress made, but the noises from both sides were more soothing than they have been of late. Speaking to reporters on Saturday, Steven Mnuchin, US Treasury secretary, sought to dismiss the trade tensions. He had received assurances from Yi Gang, the governor of China’s central bank, that Beijing would not engineer a competitive devaluation of the renminbi to offset the tariffs, which Mr Yi had pledged in a statement to the IMF’s governing body.

Mr Mnuchin also dismissed the prospect of China dumping its US Treasury holdings, another retaliatory tool Beijing could unleash, saying he was not “losing any sleep” over the issue and US debt had plenty of buyers.

But Mr Mnuchin did not offer any evidence that a breakthrough was close. There had been “no decision” on a possible meeting between US president Donald Trump and Xi Jinping, China’s president, at the G20 summit in Argentina next month, even though talks were continuing.

“Our objective with China is very clear, it’s to have a more balanced trading relationship,” Mr Mnuchin said.

Tension between Italy and the EU authorities was in plain sight, although both sides urged calm. Mr Draghi, an Italian, said, “this discussion which is naturally complex — because we’re talking about a budgetary expansion in a high debt country — becomes much more complicated if people started in our country to put in question the euro”.

“I think these statements have created real damage and there is plenty of evidence that spreads have increased in connection with these statements,” he added.

Poul Thomsen, the top IMF official for Europe, said it was “not the time to relax fiscal policy” in a pointed rebuke of Italy’s plans.

But at a late night press conference on Friday night, Giovanni Tria, Italy’s finance minister, dismissed the notion that Italy was under attack from international institutions, and insisted the fiscal expansion in the budget was “limited”, not “explosive”.

In emerging markets, especially in Asia, the question over the transparency of debt was repeatedly raised in connection with China’s Belt and Road Initiative, with Caroline Freund, director for trade, competition, regional integration and investment at the World Bank, flagging concerns over poor transparency and often unknown terms linked to Chinese lending for these infrastructure projects.

“Some low income countries lack the capacity to service this debt,” said David Dollar, senior fellow at Brookings Institution at a BRI panel, adding that China should take a closer look at borrowers’ fiscal sustainability and consider “giving more concessional loans for countries that cannot borrow at commercial rates” and end up having to service debt through exports and foreign exchange.

Pakistan on Thursday formally requested IMF financial assistance — that could turn into its 13th IMF bailout in three decades — amid controversy over the $62bn China-Pakistan Economic Corridor plan worsening Islamabad’s current account deficit, which the IMF believes will widen to 5.9 per cent of GDP by year-end.

But Zou Jiayi, China’s vice minister of finance, said Beijing “attaches a lot of importance” to BRI countries’ debt servicing capacity as a creditor and stakeholder. “That is our money . . . The Chinese government encourages those lenders to develop debt sustainability analytical frameworks,” she added.

With all of these issues rippling across the global economy despite its current strength, delegations looked for leadership to be offered, but with the US administration having abdicated from this traditional role, the concern was that the world was entering a more difficult period without the usual safeguards.

Few disagreed with the IMF’s conclusion that “policy uncertainty, historically high debt levels, rising financial vulnerabilities and limited policy space could further undermine confidence and growth prospects”.

Chris Giles & James Politi & Stefania Palma