Challenges to the International Monetary System: Rebalancing Currencies, Institutions, and Rates Takatoshi Kato Deputy Managing Director International Monetary Fund September 3, 27
1 9 Growth has been Good Across All Regions of Emerging Markets and Developing Countries (annual percent changes) Emerging Asia 8 7 6 5 4 Africa Middle East Central and Eastern Europe Western Hemisphere 3 2 1 2 21 22 23 24 25 26
Strong Macro Fundamentals in Emerging Markets as a Whole (Percent of total emerging market GDP) 7 6 5 Reserves (cumulative since 1985) Current account Net private flows 4 3 2 1-1 -2-3 1985 199 1995 2 25
5, Emerging Market Stock Indices: A Moderate Correction So Far (daily; Morgan Stanley Capital International) 45, 4, 35, Current 3, 25, 2 IT crash 2, 15, 1, 5, LTCM/Russian debt crisis 9/11/21-36 -3-24-18-12 -6 6 12 18 24 3 36
Latvia Bulgaria Estonia Lithuania Romania Greece Slovak Rep. Turkey South Africa Hungary Australia Czech Rep. Slovenia Poland Colombia India Korea Brazil Thailand Argentina Indonesia Chile Philippines China Russia Venezuela Malaysia Saudi Arabia Singapore 3 25 2 15 1 5-5 -1-15 -2-25 But are Large Current Account Deficits an Indicator of Vulnerability? (In percent of GDP, 26)
Global Growth and Financial Globalization 6 5 4 United States Japan China Rest of the world World GDP Growth (PPP Terms) (Annual percent change) Euro area Other advanced economies India 3 2 1-1 8 6 4 2-2 -4-6 85 9 95 2 5 Gross private inflows Gross private outflows Private Capital Flows (in percent of EM GDP) 1985 199 1995 2 25
Spreads (In basis points) 175 15 EMBIG (LHS) US Corporate High Yield (LHS) US Corporate High Grade (LHS) 125 1 75 5 25 97 99 1 3 5 7
Financial Market Volatility (in percent) Stock Market Indices (Jan. 2=1) U.S. S&P 5 DJ Euro Stoxx Nikkei 225 12 9 6 1 2 3 4 5 6 7 Industrial country equities Implied Volatilities (percent; 1-day mma) Emerging Market Currencies Major currencies 1 2 3 4 5 6 7 3 5 45 4 35 3 25 2 15 1 5
Short-Term Funding Markets (3-month LIBOR minus T-bill rate) 2.5 2. U.S. 1.5 U.K. 1..5 Euro area/ Germany. Japan 1/1/7 3/1/7 5/1/7 7/1/7 9/1/7
35 3 25 2 15 1 5 U.S. Spreads Widening: How Much and For How Long? Mortgage Spreads (in basis points) Conforming (over Treasuries) 1/ Jumbo (over Treasuries) Subprime ABS (over LIBOR; RHS) Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 1 8 6 4 2 Corporate Spreads (basis points; over Treasuries) A-rated BBB-rated BB-rated Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 9/1 8 7 6 5 4 3 2 1 1/ Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac.
12 11 1 9 8 7 6 Spreads for European Banks and Corporates Have Widened 8 7 6 5 4 3 2 1 CDS Spreads on Selected U.S. and EU Banks U.S. Banks S&P downgrade EU Banks (in basis points) IKB rescue BNP-Paribas announcement 7/2/7 7/16/7 7/3/7 8/13/7 8/27/7 United States Germany Impact on Bank Capital (percent of Tier 1 capital) Actual United Kingdom Worse Case France Netherlands Switzerland Source: Fitch Ratings, Asset-Backed Commercial Paper & Global Banks Exposure 1 Key Questions, 9/7/7.
Estonia Lithuania Croatia Bulgaria Hungary Romania Turkey Russia 4 35 3 25 2 15 1 5 Latvia Kazakhstan Large External Inflows to EMCs Have Financed Rapid Credit Growth and Asset Price Increases Change in Domestic Credit, 24-26 (percent of GDP) Housing Prices (23=1) 24 25 26 4 35 3 25 2 15 1 5 Kazakhstan Latvia Russia Estonia Lithuania Bulgaria South Africa Croatia Hungary
Inflation and Inflation Expectations 3 Inflation (percent) Euro area (HICP) U.K. (HICP) Inflation Expectations (from 1-year index-linked bonds) U.K. 3.5 3. 2 U.S. Canada (2-yr) 2.5 1 U.S. (PCE core) Euro area 2. 1.5 Japan 1. -1 Japan (CPI core).5-2 4 5 6 7 July 4 5 6 7 9/6/7.
Oil and Gasoline Prices (U.S. dollars per barrel) 12 1 NY Gasoline WTI Spread (right axis) NY Gasoline WTI 7 6 8 6 5 4 3 4 2 2 1 Jan-7 Apr-7 Jul-7 Aug
Key Current Account Surpluses may Persist, Even if the U.S. Deficit Narrows (In billions of U.S. dollars) China, Japan, and Saudi Arabia combined current accounts United States current account Other oil exporters combined current accounts 2 22 24 26 1,2 1, 8 6 4 2-2 -4-6 -8-1, -1,2
External Imbalances in Select Countries (Percent of GDP) 3 2 1-1 -2-3 Net income United States Oil trade Oil trade Current account Saudi Arabia Net income 7 6 5 4 3 2 1-4 -5-6 -7 Non-oil trade Current account Non-oil trade -1-2 -3-8 2 1 2 3 4 5 6 2 1 2 3 4 5 6-4 5 4 3 2 1 Euro Area Non-oil trade Current account China Current account 18 16 14 12 1 8-1 -2-3 Oil trade Net income Non-oil trade Net income Oil trade 6 4 2-2 -4 2 1 2 3 4 5 6 2 1 2 3 4 5 6-4
U.S. Current Account Financing (in billions of U.S. dollars) 1 9 8 Holdings of U.S. asset-backed securities by foreigners (change in stock) Current account deficit 7 6 5 4 3 2 1 23 24 25 26
China: Bilateral and Real Effective Exchange Rate 7.5 7.6 7.7 Renminbi per U.S. dollar (LHS; inverse) REER (RHS; 2=1) 98 96 7.8 7.9 94 8. 8.1 92 8.2 8.3 9 8.4 88 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7
IMF Credit Outstanding in the General Resources Account 8 (In billions of SDRs) 6 4 2 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27
IMF Surveillance WEO GFSR Multilateral Surveillance Bilateral Surveillance Article IV Consultations Overseeing the international monetary system as a whole Assessing member countries economic policies Exchange Rates 27 Decision on Surveillance over Exchange Rates Consultative Group on Exchange Rate Issues (CGER)
Fundamental Misalignment Misalignment is likely to persist. Is the underlying current account stripped of temporary or cyclical factors in equilibrium? Misalignment is significant. The judgment of fundamental misalignment needs to be beyond any reasonable doubt.
CGER Methodology Complementarity of three approaches. Macroeconomic balance Equilibrium REER External sustainability In steady state, answers should be similar. This provides confidence in our assessments. But... There are large margins of uncertainty around the CGER estimates.
IMF Governance Reform Objectives Realign quota shares with members relative global economic weight Enhance the participation and voice of low-income countries
IMF Governance Reform: Managing Director s s Agenda Integrated program approved by Board of Governors in Singapore: Initial ad-hoc increases for a small group of clearly under-represented represented members Second round of ad-hoc increases based on a new quota formula Increase in Basic Votes Additional resources for African Executive Directors
Thank You