Emerging economies fail to contain outflows

Nusa Dua (Indonesia): After suffering months of capital outflows, policy makers from emerging markets attending IMF-World Bank meetings in Indonesia had a message for leading economies: current monetary and trade policies risk undermining us all.  

The IMF-World Bank meetings wrapping up on Sunday gave central bankers and finance ministers from around the world a chance to meet face-to-face in Indonesia, whose rupiah currency hit a new 20-year low this week.

Poorer and populous emerging markets have been particularly vulnerable to the escalating US-Sino tariff war and rate rises by the US central bank. Investors dumped assets seen as riskier, sparking painful currency plunges that have punished countries from India to recession-hit South Africa, as well as triggering crises in Turkey and Argentina.

“We are all aware that the normalisation of the monetary policy in the US, combined with their fiscal policy and trade policy ... are all creating a systemic impact to the whole economy in the world,” Indonesian finance minister Sri Mulyani Indrawati said in an interview during the meetings in Bali.

The Federal Reserve’s nearly three-year-old tightening cycle has in part prompted a global shift in capital away from emerging markets and after three hikes this year, it foresees another December rise, three more next year, and one in 2020.

A senior Fed official in Bali said the rate rises were right for domestic policy and ensuring they were gradual and predictable was “the best solution” for minimising unintended volatility in emerging markets.

In a bid to support the rupiah, Bank Indonesia has raised rates five times since mid-May and intervened regularly, but still the currency has lost nearly 11 per cent this year, leaving it at the weakest levels since the 1998 financial crisis.

Finance ministers for developing nations in the Group of 24 economies urged major economies to reform the global trading system, rather than discard it.

The G24 statement said all emerging markets were “adversely affected” by excessive capital flow volatility.