Geopolitical fragmentation, China’s policy miscalibration, global stagflation risks, EM winners and losers, and poorer nations’ debt distress dominate discussions at the IMF Spring Meetings.
Geopolitical Risks, Future of Dollar Base System
We are at the IMF Spring Meetings this week, and it’s now a “speed-dating” phase – when we are running across the city, joining discussions on individual countries and regions. But we are not neglecting global issues either – geopolitical fragmentation/new international order (new Cold War?), the future of the U.S. Dollar-based international monetary system and the role of cryptocurrencies, energy security, and setbacks in the fight against poverty that can lead to widespread civil unrest in lower-income countries are front and center in many discussions. Concerns about the U.S. growth outlook appear contained, and the consensus view is that balance sheets are in a decent shape, and that the U.S. consumer is strong. Still, volatility and high inflation are here to stay, especially if excess savings are spent quickly adding to price pressures. The European concerns center more on the recession risk rather than the inflation risk – but the fight between the ECB’s hawks and doves is attracting a lot of attention. On the fiscal front, many participants underscored the need for “nimble” and “agile” policies to protect the most vulnerable groups of the population.
China Policy Miscalibration
As regards individual countries, China discussions focus a lot on the risk of secondary sanctions, the impact of the strict lockdowns and the zero-COVID policy on domestic politics (and relations with the U.S.), and miscalibration of the policy stimulus. LATAM’s swing to the left and changes in global supply chains can play a big role going forward, but the sentiment about Brazil is fairly optimistic. The Gulf economies emerged as clear winners in the current situation – not only because of higher oil prices and OPEC+, but also due to the fact that there was a sustained structural reform effort in the past 4-5 years.
Poor Nations Debt Distress
Frontier markets are “on trial”, being hit by a succession of exogenous shocks, which now include the impact of the Russia/Ukraine war on food and energy prices. Higher transport costs work just like trade tariffs, boosting the underlying costs of running a business and undermining these countries’ ability to recover after a shock. So, we are hearing more concerns about debt sustainability in poorer nations (see chart below) and more calls to improve the debt management system for these countries. Coordination challenges are key, because the composition of creditors changed massively in the past 20 years – including a much greater role played by Chine. The U.S. Treasury appears to be more open to including more countries into the G20 Common Framework – would China be on board? Stay tuned!
Chart at a Glance: Low-Income EM – Rising Risk of Debt Distress
Source: International Monetary Fund
