Christine Lagarde, IMF managing director, said Tuesday that after years of success, emerging and developing countries are now confronted with a new reality. Growth rates are down, and cyclical and structural forces have undermined the traditional growth paradigm.

 

At a Banque de France conference in Paris to mark the retirement of Christian Noyer, former governor, the Fund chief said in a speech that a 1% slowdown in emerging markets would cause already weak growth in advanced countries to slow by about 0.2 percentage points.

Last week, the World Bank warned that forecasts of a slight uptick in global growth in 2016 "are subject to substantial downside risks. A more protracted slowdown across large emerging markets could have substantial spillovers to other developing economies, and eventually hold back the recovery in advanced economies."

Lagarde on Tuesday cited statistics on why emerging and developing economies are important:

these countries are home to 85% of the world’s population. And it is not surprising that — slowly but steadily — these 85% have become a major engine of global activity!
Today, emerging and developing economies account for almost 60% of global GDP, up from just under half only a decade ago. They propped up the global economy as advanced countries grappled with the after effects of the financial crisis. Together they contributed more than 80% of global growth since the crisis.
On current forecasts, the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern.

Lagarde said the transformation of China to a consumer economy will have spillover impacts and on capital flows, she called for less reliance on debt and greater use of equity financing. Lagarde says emerging markets suffer from the “short-term nature and inherent volatility” of global capital flows.

She said that if financial tightening by the US were to coincide with further easing in the euro area and Japan, there could be further dollar appreciation vis-à-vis the euro and the yen.

For emerging economies, this could raise vulnerabilities in sectors with dollar exposures, especially corporates. Foreign exchange exposures by corporates have grown sharply over the last five years, in part because of the search for yield in a low interest rate environment...There is an inherent debt bias embedded in the global tax system. More generally, the international monetary system would benefit from a higher share of equity compared with debt flows. This can be achieved by examining instruments that alter the composition and nature of international flows — away from short-term debt and toward longer-term equity flows.
Overall, a global shift toward more long-term, equity-based capital flows would alleviate concerns about reversals, and lessen the need for insurance. It would also reduce the size of financial buffers that emerging and developing countries need to maintain.

Lagarde said energy prices would remain low in the medium term.

Not only have oil and metals prices fallen by around two-thirds from their most recent peak, but supply and demand side factors suggest that they are likely to stay low for a sustained period...Many commodity exporting emerging and developing economies are under severe stress, and some currencies have already experienced very large depreciations. We have all seen it in Latin America, and I have seen it first-hand last week in Nigeria and Cameroon — two countries that are hit hard by lower oil prices and domestic fragilities.

Banque de France, La Galerie dorée, Golden Gallery

The Banque de France was created in 1800 by Napoléon Bonaparte. La Galerie dorée (Golden Gallery)
at the Hôtel de Toulouse bank headquarters, Paris.