The U.S. and fellow industrial countries turned the tables on emerging nations by demanding they do more to aid economic development after some blamed the Federal Reserve for roiling currency markets.
On the eve of discussions among Group of 20 finance chiefs in Sydney, U.S. Treasury Secretary Jacob J. Lew and U.K. Chancellor of the Exchequer George Osborne put the onus on developing economies for shoring up investor sentiment after their currencies faced the weakest yearly opening since 2010 and the MSCI Emerging Markets Index relinquished 5 percent.
“Emerging markets need to take steps of their own to have their fiscal house in order, have their structural reforms in place,” Lew said yesterday. Osborne said that the Fed’s pulling back of stimulus “has been used by some countries, frankly, as an excuse.”
Such calls rebut recent complaints from India to South Africa that the Fed’s tapering of asset purchases triggered the market sell off. They instead promote the counter-argument that investors will reward those economies which act to support expansion and fight flaws such as political discord or current account deficits.
Decisions Made
“We’re seeing substantial differentiation in the market place between economies that have made those decisions and economies that haven’t,” said Lew.
The G-20 will back the normalization of monetary policy in advanced countries and pledge to take “concrete actions” to bolster growth, according to a draft communique seen by Bloomberg News. It also will pledge its central banks carefully calibrate and clearly communicate monetary policy.
U.S. stocks sagged down yesterday on speculation the Fed is unlikely to slow the pace of stimulus cuts.
The Organization for Economic Cooperation and Development used the talks to warn of a “new low-growth era” if policy makers fail to find ways to boost productivity growth, noting emerging markets are vulnerable to monetary tightening elsewhere and lower commodity prices. Secretary-General Jose Angel Gurria said today “tapering was to a very good extent predictable, it was inevitable.”
Not all emerging markets are publicly worried. China’s central bank governor Zhou Xiaochuan expressed confidence in his nation’s growth prospects, telling Bloomberg News “there’s no big problem” for the nation to maintain steady and healthy expansion.
Russian Finance Minister Anton Siluanov said in an interview the Fed had been “clear and predictable” and that emerging markets “just had to prepare for it.”
Bond-Purchasing
The Fed has pared its monthly bond-buying by $20 billion to $65 billion and signaled it will continue to pull back as the world’s largest economy expands. Policy makers are at odds over how much to blame the tapering for the selloff in emerging markets and how much to criticize developing economies for failing to restructure when liquidity was bountiful.
“It is important that emerging nations make efforts themselves to fix” issues like high inflation and current-account shortfalls, Japanese Finance Minister Taro Aso said in Tokyo yesterday.
While acknowledging emerging economies should “build their resilience to external shocks,” South Korean Finance Minister Hyun Oh Seok said in an interview in Sydney yesterday that the Fed and other western central banks should ensure their policies are “calibrated, well communicated and taken in an orderly manner.”
Seeking Consensus
The Fed should go further by seeking a consensus among international counterparts on “what is the optimum level of withdrawal that the world economy can manage,” India’s Economic Affairs Secretary Arvind Mayaram told reporters in Sydney this week.
South Africa, whose policy makers unexpectedly increased interest rates last month, wants agreement within the G-20 on the coordination of economic policies as it pushes for stronger acknowledgment of the impact of Fed tapering on smaller nations, according to Deputy Finance Minister Nhlanhla Nene.
Fed Goals
Fed Chairman Janet Yellen, who makes her international debut in Sydney after taking office this month, last week told U.S. lawmakers that the central bank sets policy “to pursue our goals that Congress has assigned.”
Central banks should have a “no surprises policy in relation to monetary policy” and have “reasonable warning” of events that may create market volatility, Australian Treasurer Joe Hockey told reporters in Sydney today.
G-20 host Australia is pushing for a growth target, an idea that’s met with support from the International Monetary Fund, South Korea and the U.K., and skepticism from Germany. The draft cites analysis that ambitious policies could raise collective gross domestic product by “at least 2 percent” above the trajectory implied by current settings over five years.
An official from a G-20 government told reporters that the final statement may tone down the reference to growth rates. Hockey said today he wouldn’t speculate on the contents of the final communique.
An official from another member country said the focus is on a global growth objective and strategies rather than on country-specific targets. The officials are involved in or have been briefed on discussions of the communique and asked not to be identified because deliberations aren’t public.
`Noble Goal'
“While a noble goal, realistically to achieve that sort of sustainable expansion will require a lot of things to go right,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “Emerging markets will be disappointed that policy stimulus withdrawal is going ahead and they will continue to see volatility as the favorable conditions that drove investment in their economies wane.”
OECD’s Gurria said having a number could be useful “to focus, to concentrate, the mind” and provide a signal to say “we’re all committed to move in a way that is mutually reinforcing.”
European Union Economic and Monetary Affairs Commissioner Olli Rehn said in an interview “it makes sense to set a bold growth target” on the condition that the G-20 final statement agrees on economic reforms and policies that enable reaching that goal.
The U.S recovery will benefit emerging nations in the long term and it’s desirable that G-20 nations cooperate to boost growth and employment, Bank of Japan Governor Haruhiko Kuroda told reporters in Sydney today.
The G-20 draft welcomed recent signs of improvement in the global economy and said “some key tail risks have diminished.”
Even so, “the global economy remains far from achieving strong, sustained, and balanced growth,” the draft said. “Recent volatility in financial markets and remaining vulnerabilities within some economies highlights that important risks remain to be managed.”
G-20 nations will take concrete actions to unlock private investment, lift employment and enhance trade, the draft said.
