WASHINGTON – This year’s annual meeting of the International Monetary Fund (IMF) and World Bank kicked off on Tuesday with a lively seminar on the outlook for emerging markets (EM). The message: batten down the hatches, more turbulence is coming.
Gadfly New York University Professor Nouriel Roubini predicted the next two years will be difficult. Among the challenges are the slowdown in China, likely capital outflows when the Federal Reserve begins to taper its asset purchases, the continuing debt crisis in the euro zone, and instability in the Middle East.
“When the external environment is bad,” said Roubini, the best policy is to self-insure.” That means getting domestic economies on a sounder footing by reducing fiscal and current account deficits, and implementing business-friendly structural reforms to boost competitiveness.
Asked how South Africa fits into that formulation, he replied, “I put them in the category of being very fragile. They have twin deficits as well as political problems.”
Sub-Saharan Africa soars vs SA
The IMF’s semi-annual World Economic Outlook provides a grim assessment of SA’s economic performance. Although its sub-chapter on Sub-Saharan Africa is entitled
“Continued Dynamism,” that label is attached not to SA but to the poorer countries to the north.
It states: “Growth in sub-Saharan Africa remained robust in 2012–13 and is expected to accelerate somewhat in 2014, reflecting strong domestic demand in most of the region.”
Indeed, Timothy Adams, the former US treasury official who heads the Institute of International Finance, told the emerging markets forum that Africa has emerged to join East Asia “as a second engine of global growth.”
The IMF is projecting Sub-Saharan Africa growth of 5% growth this year, rising to 6% in 2014.
But SA is dead last for growth in an IMF chart of six middle-income countries (including Ghana, Cameroon, Botswana, Senegal and Ivory Coast). That group as a whole will register 3.3% growth in 2013 and 3.9% growth in 2014. SA is at the bottom with 2% growth for this year and 2.9% projected for 2014.
See the graph below.
Selected Sub-Saharan African economies: real GDP, consumer prices, current account balance, and unemployment
Click image to enlarge
*Data for some countries are based on fiscal years.
SA lags, says the World Economic Outlook, because of “tense industrial relations, anemic private investment, and weak consumption growth.” Additional challenges, it says, are tighter financing, weak investor and consumer confidence, continued tense industrial relations, policy uncertainty and elevated household debt.
With top IMF officials presenting the slowdown in the BRICS and other emerging market economies as one of the year’s most surprising negative developments, experts said there is consensus on ways to strengthen performance. Macro policies, they said, must be prudent and market friendly.
Louis Miguel Castilla, Peru’s finance minister, said “we have to work even harder to attract more foreign investment” as a way of getting needed finance. Worried about capital outflows when Fed tapering begins, Castilla said that while Peru has benefited from lower US interest rates it’s better for the US to begin tapering sooner rather than later. Peru’s economy is expected to grow by 5.5% this year.
Adams said sound policies and good governance is the recipe for success in emerging markets. “Those countries with high current account deficits,” he warned, “are going to be sucking wind” if the global environment deteriorates.
The message to emerging economies is that the United States is unlikely to soon resume its role of importer of last resort, boosting global growth. Instead, the US seems stuck in slow “new normal” growth of around 2%. Roubini expects the deficit and debt follies in the US to drag on “possibly for another six or seven years.”
Asked by a Nigerian central banker whether the IMF has a plan for assisting emerging markets that get into trouble from tapering-related capital outflows, the reply was simply that the IMF has necessary funds as its disposal. However, Roubini said it is unlikely that emerging economies will need IMF help as regional arrangements, like the recently announced BRICS contingency financing plan, should constitute an adequate backstop.
* Economics columnist Barry Wood was for two decades the chief economics correspondent of Voice of America radio.