IMF Forecasts Slow Growth in Developing Nations


The International Monetary Fund warned on Tuesday about persistently slow growth in developing economies. These countries will not soon regain the high rates of growth that distinguished them in the past, the IMF noted.

Although emerging economies, headlined by China, Brazil, India and Turkey, account for a significant share of the global economy, their pace of growth remains sluggish. At present, it is a good 2 percent below the average of the last decade.

Such a trend would increase the likelihood of another round of financial shocks in the years ahead, the IMF explained in its most recent World Economic Outlook.

If emerging economies, many of which taken on a lot of new debt, grow at a slower pace, global investors will have less incentive to buy Chinese or Brazilian bonds. Instead, they will choose to put money to work in developed markets where the risks are not as pronounced.

To the extent that the US Federal Reserve moves to increase interest rates in the coming months, this dynamic is likely to continue, raising the possibility of another emerging-market panic roiling markets.

A flight from riskier asset classes could spark disruptive declines in asset prices and currency values, generating contagion effects and harming growth further.

Markets shuddered this year on fears that the slowdown in the Chinese economy would be more abrupt than anticipated. Dollar-based investors, who had bought high-yielding Chinese securities, pulled their money out as it became clear that the Chinese authorities were willing to depreciate their currency to jump-start growth.

Of late, there has been less pressure on the renminbi and other emerging-market currencies. Money has started to return to select emerging markets, but economists at the fund emphasized how important it was that large developing nations do all in their power to bring growth rates up some more.

Emerging-market bond funds, which experienced steep outflows this year, had inflows of more than $1 billion in the first week of April — the highest since early 2014 — according to EPFR Global, a research group that tracks investment flows.

Economists at IMF expect these economies to grow at 4.1 percent this year, barely up from 4 percent last year.

Chinese growth is set to shrink to 6.5 percent in 2016 and 6.2 percent in 2017, from 6.9 percent last year, the fund forecasts.

And the economies of Russia and Brazil, which together make up 6 percent of global activity, have been shrinking since the middle of 2014.

Lower growth means less room for error. Persistent slow growth has scarring effects that themselves reduce potential output and demand and investment.

On a positive side, the I.M.F. took note of the recent bounce in emerging market assets over the last month thanks in part of a modest recovery in the price of oil and a growing sense that the Chinese government was going to do everything in its power to defend its currency.

Still senior fund officials say that one of the pressing issues to be discussed this week is the notion of trying to institutionalize a global safety net which could, in theory, help a country in crisis before it runs out of money.

In that vein, the fund has tried to promote so-called precautionary financial arrangements, whereby a country experiencing a short-term outflow of funds could sign up for a line of credit from the I.M.F., in the hope that this would reassure skittish investors.

These programs have not taken off, however, as countries remain fearful that any form of pact with the fund brings with it a negative stigma that would only make the situation worse.


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