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IMF cautious on emerging economies

Medium-term prospects for emerging market economies are weaker, says the IMF

Medium-term prospects for emerging market economies are weaker, says the IMF

In its latest economic outlook report the IMF was cautious about the perspectives for emerging markets without sliding into pessimism over the impact of US monetary policy on growth.

“Medium-term prospects for emerging market economies are weaker,” the IMF said Tuesday in its semi-annual World Economic Outlook report.

Growth rates in emerging market and developing economies are now down some three percentage points from 2010 levels, mostly due to a slowdowns in Brazil, China, and India, the IMF said.

“Projections for 2016 real GDP levels for Brazil, China, and India have been successively reduced by some 8 to 14 percent over the past two years,” the organisation said.

The IMF also reduced China’s 2013 growth forecast by 0.2 points to 7.6 percent and the 2014 forecast by 0.4 points to 7.3 percent.

India’s 2013 growth forecast was cut sharply by 1.8 points to 3.8 percent and the 2014 forecast reduced by 1.1 points to 5.1 percent.

But despite the growth slowdown in the major emerging economies, often referred to as the BRICS, the fund noted that the medium-term forecast was still above that during the decade leading up to the Asian financial crisis in 1997-1998.

The emerging market “slowdowns are hardly unprecedented” said the IMF.

“For some of the BRICS, they are not even unusual,” it added, pointing out that the current slowdown is milder than previous ones for China and Brazil, whose 2013 forecast was left unchanged at 2.5 percent and cut 0.7 points to 2.5 percent for 2014.

Closing out the BRICS, the IMF cut its forecast for the Russian economy this year by 1.0 point to 1.5 percent and by 0.3 points to 3.0 percent in 2014. South Africa’s growth forecasts were left unchanged at 2.0 percent for 2013 and 2.9 percent in 2014.

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Over the longer term, the IMF expects the “…drop in growth rates to prove durable in only two economies: China and Russia” for the simple reason their current growth models have nearly run their course.

China’s model based on extensive growth has led to overcapacity and diminishing returns, with demographic trends now turning against expansive policies.

The IMF said “without fundamental reform to rebalance the economy toward consumption and stimulate productivity growth through deregulation, growth is likely to slow considerably.”

For its part, Russia has “exhausted” its growth model of rising oil prices and using up spare capacity.

Emerging markets ‘better prepared’ for tightening of US monetary policy

The IMF was cautious but not alarmist about the impact of the US Federal Reserve’s announced intention to begin reducing the amount of monetary stimulus it injects into the US economy from the current level of $85 billion a month.

The announcement wreaked havoc in emerging markets as investors pulled out funds in anticipation of higher US interest rates, hitting emerging world share prices and currency exchange rates.

The IMF reviewed historical data and found “no broad-based deterioration in global economic and financial health occurred at the onset of previous episodes of US monetary policy tightening since 1990.”

Moreover, it noted that emerging markets have better policies in place today, with greater exchange rate flexibility and higher foreign exchange reserve buffers.

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“They should, thus, be better prepared to weather a tightening in external financing,” said the IMF.

AXA Investment Management economist Manolis Davradakis said that by the delaying the start of the so-called tapering of its stimulus the Fed was giving emerging markets “time to introduce structural reforms and address their financial needs” or at least announce such reforms.

Olivier Gayno at HSBC Global Asset Management France said that a tightening of US monetary policy will lead to “slower but more balanced growth” that is less dependent on financial inflows from developed to developing economies.

Furthermore, a slow tightening of US monetary policy is also good news for emerging economies as it is a sign of improvement of the US and global economy, he added.

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