Economics Commentary


Emerging markets capital markets

Central bank asymmetric reserve allocation and capital markets volatility

Global Financial Stability Conference, Seoul, 22-23 June 2015

Central bank capital markets interventions through foreign exchange reserve allocations have become critical determinants of national and international capital markets developments. However, many economies, including in particular most emerging markets economies largely lack central bank capital markets participation. The asymmetry in central banks' reserve allocations may induce undue biases in the distribution of international capital markets volatility.[...]

The Chinese money wall

Milken Institute London Summit, 28 October 2014

The adoption of unconventional monetary policies by several leading central banks has raised widespread concerns about undue monetary expansion, possible asset price distortions and exchange rate manipulations and related adverse external spillovers. However, the biggest monetary threat may be quite a different one. China dominates monetary issuance today by far. The world broad money supply has nearly doubled since the beginning of the global economic and financial crisis mostly due to China. Unless money is entirely neutral, the significant shift in relative inter-country monetary balances is likely to have some real and relative price implications. It is similarly likely to be a key determinant for the further integration of China into the international financial system.[...]

International portfolio investment holdings—2013 update

2 October 2014

International portfolio investment holdings increased significantly in 2013. The increase was driven largely by investments in debt securities and a significant allocation to the U.S. The share of investments in the Euro area has also increased while investments in emerging markets declined. Portfolio country and securities allocation patterns continue to differ between all countries and emerging markets. International portfolio investments have continued to progress with the level of total holdings in 2013 being more than four times as high as in the early 2000s.[...]

Banking Union, asset managers and financial integration

Banco de Portugal, Lisbon, 14 September 2014

The establishment of the European Banking Union is seen as essential to foster a reintegration of the European banking system. This is viewed also to support restoring the effectiveness of the ECB’s monetary policy amid the adverse relationship between financial fragmentation and the workings of the monetary transmission channels. However, the financial disintermediation of the European banking system may diminish considerably the importance of the banking sector relative to other financial sector participants. By simple conjecture, the increasing heterogeneity of financial sector participants in euro area financial markets suggests that the actual impact for a single monetary policy of a successful Banking Union may be more limited than generally assumed. [...]

Argentina and sovereign debt restructuring

21 July 2014

The decision of 16 June by the U.S. Supreme Court to deny a petition filed by Argentina in relation to holdout claims serves as an important reminder of persistent major uncertainties in the principles guiding sovereign debt workouts. The petition was to review a decision of the U.S. Courts of Appeals affirming district court orders of 7 December 2011 for full payout to holdouts of Argentina’s 2005 and 2010 debt restructurings. The decision affirms ambiguity of at least five key aspects of sovereign debt restructuring: What equitable distribution or pari passu means, what rateable payments are, the relevance of collective action clauses (CACs), the seniority in distribution of the International Monetary Fund (IMF) and the role of payment agents in dispute cases. Noting that the relevant U.S. court maintains that there are very limited broader implications of its ruling amid the extraordinary circumstances of Argentina, the decision is deemed here to have major adverse repercussions on the incentives for participating in sovereign debt restructurings. This risks unduly inflating the costs of sovereign default.[...]

Middle income trap and international portfolio allocation

Austrian National Bank, Vienna, Workshop 18, 27-28 February 2014

The present note links the middle income trap to the EU convergence methodology and aims to offer by simple conjecture several discussion points on immediate and intermediate consequences of the middle income trap for portfolio investments in emerging markets. The note affirms prima facie evidence of the existence of the middle income trap between 1992 and 2012 highlighting differences between EU and emerging markets economies. Nominal and real convergence patterns are reviewed showing significant differences in the duration of nominal and real convergence cycles. Fixed income appears to offer attractive investment opportunities amid short convergence cycles. The long duration of real convergence cycles seems to indicate that emerging markets stock market outperformance may remain elusive over normal investment horizons. The relationship between portfolio flows and economic growth may establish self-fulfilling expectations for generating conditions for the middle income trap.[...]

Countries’ economic vulnerabilities (update)

22 October 2013

The recent IMF World Economic Outlook (WEO) seems to affirm the notion that the international economy has become more fragile. The vulnerability indicator on the basis of the revised October 2013 data compared with the April 2013 data shows that the composition of the 20 most vulnerable countries remains broadly unchanged while economic fundamentals on average have slightly deteriorated with some exceptions. India has replaced the UK as the most vulnerable country and Argentina is now among the 20 most vulnerable countries while Poland dropped out (Chart 1). Italy, Ireland, Canada and Brazil show some notable increases in vulnerability.[...]

Public financial corporations: Investment performance valuation and the exchange rate

20 September 2013

The recent exchange rate jitters serve as an important reminder that exchange rates matter for investment performance attribution and consequently exhibit important wealth implications. This is of particular significance to government entities that perform international investment functions given the importance for government finance sustainability. Public financial corporations (PFCs), of which stabilisation funds and sovereign wealth funds constitute important subsets, generally aim to provide support for government finances through international financial investments. Investment performance of PFCs therefore constitutes a critical component of governments’ fiscal policies. Different practices co-exist internationally of performance valuations of PFCs in particular with regard to the exchange rate.[...]

Euro vision: Less than clear

Euro50 Group and Reinventing Bretton Woods Committee, Florence, 3-4 July 2012

I participated in the Reinventing Bretton Woods Committee/Euro50 Group meeting in Florence, Italy on 3-4 July “The Eurozone of yesterday, today and tomorrow.” The meeting brought together the strongest minds from academia and policy circles on Eurozone issues. My main takeaway of the proceedings is the utter disarray of what went wrong and should or could be done to stabilize the Eurozone. This appears all the more remarkable as we are in the fifth year of the global financial and economic crisis. The conclusion must be then that if a gathering of top technocrats cannot reach agreement on steps towards a resolution it seems inconceivable policy makers can. [...]

Trade redirection

20 September 2010

Emerging markets are set to continue to grow significantly faster than advanced economies. This rests in part on increasing reliance on domestic consumption. It reflects above all growing exports to other fast growing emerging markets. The increasing progression towards inter-emerging markets international trade is naturally a reflection of the increasing economic weight of emerging markets in the international economy. Yet, it could be the key driver of and basis for sustained higher overall economic growth. [...]

Eurodollar jitters and emerging markets

11 August 2010

The most important price of the international economy has become increasingly jittery. The dollar/euro exchange rate volatility has reached its highest level since the final collapse of Bretton Woods of fixed exchange rates. Previous episodes of heightened eurodollar volatility have coincided with or an- nounced a major turning point in the eurodollar exchange rate. The importance of eurodollar suggests that there is sub- stantial uncertainty at the core of the international economy including but not limited to growth, fiscal policy and monetary policies. Its significance for the exchange market also suggests that it may risk contaminating other currency crosses. [...]

South-south investments

8 February 2010

Emerging markets are increasingly seeking investments in other emerging markets. The latest IMF portfolio investment data (CPIS) show that emerging markets continue to allocate an increasing proportion of their cross-border portfolio investments to other emerging markets. This contrasts with persistent sluggish portfolio investments in emerging markets by advanced economies. The asymmetry in allocation behaviour seems to reveal significant differences in views about the international economy and where it is heading, namely emerging markets seem increasingly confident about themselves. [...]

Central banks and emerging markets liquidity

27 July 2008

Central banks have traditionally attached a high priority to market liquidity for the investment of their foreign exchange reserves. This is due in part to criteria governing the definition of central bank reserves. While many central banks have tiered their reserves to allow differential allocation criteria and investment horizons, liquidity considerations have remained important. Very large central banks contemplating building sizeable portfolios in emerging markets assets, generally in excess of US$10 billion, are concerned that they would have to overly compromise on liquidity and that significant allocations may cause unwanted price movements. [...]