EMErging issues

Aug 23 2013, 02:26 IST
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SummaryG20 leaders would do well to hear out B20 leaders before monetary measures queer the pitch for global economic recovery

There are likely to be two issues of vital interest from an emerging market perspective at the eighth G20 summit to be held in St Petersburg, Russia, on September 5-6, 2013. They need to somehow ensure that their interests are protected at a time faltering growth is undermining their voice within the G20.

The first issue relates to non-conventional monetary policies adopted by advanced economies, and the management of their public debt. It may be recalled that the initial reaction of EMEs, and particularly of the BRICS, to quantitative easing (QE) was, on the whole, negative. This was reflected in G20 summit declarations. China was critical because it devalued the dollar, and therefore the value of its large holding of US Treasuries and GSE (mortgage) holdings. As a commodity exporter, Brazil stood to gain from the rise in commodity prices. Its objection was to the appreciation of the Real on account of the sharp increase in capital flows. Guido Mantega, the finance minister of Brazil, famously coined the term ‘currency wars’ before imposing capital controls as a result. India was most affected by commodity price inflation. However, on account of the need to finance its large current account deficit (CAD), its views on capital inflows were muted.

The EMEs’ reaction to QE3, especially following the Bank of Japan’s decision to purchase $75 billion treasury bonds each month (over and above the US Fed’s monthly purchase of $85 billion), is however subdued. Brazil, Turkey, Indonesia, South Africa and India experienced sharp depreciation as CAD increased and capital inflows declined. Brazil started rolling back capital controls, and India is in line to ease them, to attract more foreign capital. The recent rise in US treasury bond yields has sharply reduced capital flows to EMEs and aggravated the problem. If just the talk of QE rollback has triggered tremors in EMEs, the situation could worsen to crisis proportions when it actually starts. It is, however, difficult for EMEs to take a position against this rollback in view of their earlier opposition to QE.

Monetary policy the world over responds to the domestic business cycle. The case of the US Fed is, however, singular in that its policies also shape cross-border capital flows by virtue of the dollar being the effective global reserve currency. This constrains the monetary stance of other countries in ways that may be inappropriate for their own business cycles. In 2007-08, when the

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