The International Monetary Fund (IMF) has warned that the U.S. President Donald Trump’s trade war presents an even tougher challenge for emerging market policymakers than the Covid-19 crisis five years ago. The firm noted that central banks are moving in the same direction in easing monetary policy fast.
IMF’s first deputy managing director, Gita Gopinath, argued that the unpredictable impact of tariffs on developing countries and global markets would make it particularly difficult for central bankers to support their economies. She said U.S. levies present a tougher challenge for emerging market policymakers than during the pandemic.
U.S. tariffs pose a challenge to emerging markets
Gita Gopinath from IMF (International Monetary Fund) warns:
If Trump reintroduces tariffs, especially on Chinese goods, it might push inflation higher and hit emerging markets hard.1. Global trade volumes are already slowing.
2. Tariff wars could shrink growth for low-cost… pic.twitter.com/lM2Jblf8Bu
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Gopinath noted that in the early stages of the COVID-19 crisis, central banks everywhere adopted the same direction of easing monetary policy at a fast pace. She also believes that this time around, the shock has differential effects.
The IMF official added that Federal Reserve policymakers have been signaling they are not ready to lower interest rates until they are confident tariffs will not further stoke inflation. She also argued that the situation looks more like a demand shock for emerging markets facing higher U.S. trade barriers, which means slower inflation and growth.
According to IMF’s Gopinath, the situation contrasts with the onset of the pandemic, when central banks cut interest rates to offset the impact of the crisis. She also noted that central banks announced bond-buying programs at the time to try and help restore growth in both rich and middle-income countries.
“We have this kind of a divergence you could end up with tightening global financial conditions, and emerging markets are particularly sensitive to such changes in global markets.”
–Gita Gopinath, Deputy Managing Director of the IMF.
Since Trump announced sweeping reciprocal tariffs two months ago, emerging market currencies and stocks have largely rebounded. The IMF believes the bounce back came from investors betting that central banks will be largely free to stimulate their economies despite the risk that higher rates in developed countries will draw capital away.
An MSCI index of emerging markets that excludes China, the main target of Trump’s trade policies, has surged almost 20% since its low shortly after the announcement of the reciprocal tariffs on April 2. The Korean won, Mexican peso, and South African rand have added more than 5% on a spot basis as investors have fled the U.S. dollar over the same period.
Global economy worsens to Covid-19 levels
The Organisation for Economic Co-operation and Development (OECD) warned on Tuesday that the global economy is heading into its weakest growth spell since the Covid-19 drop. The report also revealed that the risk of disruptive capital flows has risen in emerging economies.
Several emerging markets have appreciated against the dollar as investors reduced their exposure to the U.S. The Paris-based OECD also noted in its latest economic outlook that the situation remained volatile.
The organization said many emerging markets are at risk of experiencing capital outflows if relative economic prospects and global risk sentiment deteriorate. OECD believes it could lead to currency depreciation pressures and higher financing costs. Gopinath also mentioned that emerging markets were “steering through the fog” given the volatility of Trump’s trade policy, making the situation even more precarious.
Economists have also warned of the impact of tariffs and lower U.S. demand on emerging markets, given that U.S. interest rates and long-term borrowing costs are nearing their recent peaks. Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, said traditionally, a weaker dollar meant fewer exports for emerging markets but cheaper funding costs.
Garcia argued that now there are weaker exports but no cheaper funding because the long end of the bond curve is very high. Gopinath said the resilience of developing economies is also affected by reliance on non-bank financial flows and the increasing importance of crypto as an asset class. She added that it was a relatively early stage, but they are seeing rapid crypto uptake growth in some emerging markets.
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Source: https://www.cryptopolitan.com/imfs-gopinath-trade-tensions-are-a-threat/
