Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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Brexit, Emerging Markets, and Venezuela in the News

by Robert Kahn

Three things to think about today.

  1.  If you haven’t already done so, subscribe now to my colleague Brad Setser’s blog, which provides excellent commentary on global macro issues. His most recent piece makes a compelling case for European fiscal action against the backdrop of a meaningful UK and European growth shock, a point that I very much agree with (listen also to my conversation with Jim Lindsay and Sebastian Mallaby here).
  2. I remain puzzled that this industrial country growth shock has not had a broader effect on emerging markets. Reports are that portfolio outflows from EM were minor on Friday, with some recovery this week. One view is that as long as China’s economy remains on track, commodity prices hold up, and the Fed is on hold, emerging markets should weather the Brexit shock. Conversely, the IMF has worried that declining trend growth in the emerging world reflects a rising vulnerability to globalization.
  3. The humanitarian situation in Venezuela has become critical. I have focused in past blogs on the severe economic consequences of the crisis, and the need for a comprehensive, IMF-backed reform effort, supported by substantial financing and debt restructuring. China’s recent agreement to push back debt payments due recognizes the inevitable but is unlikely to provide additional free cash flow to the government or the state energy company PDVSA. For investors, default now looks to be coming soon.

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Brexit’s Threat to Global Growth

by Robert Kahn

Thursday’s Brexit vote wasn’t a “Lehman moment”, as some have feared. Instead, it was a growth moment. And that may be the greater threat. If policymakers respond effectively, the benefits could be substantial: a stronger global economy, and an ebbing of the political and economic forces now pressuring UK and European policymakers. Conversely, failure to address the growth risks could cause broader and deeper global economic contagion.

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Venezuela on the Edge

by Robert Kahn

The Venezuelan government has a $2.3 billion debt payment due this Friday. Most believe the government has the resources to make the payment, though it is hard to see a coherent economic reason to do so. The economy is descending into a deep and profound crisis—reflected in severe shortages, hyperinflation, and a collapse in economic activity. It faces a widening financing gap, and has imposed highly distortive foreign exchange controls. Debt service far outstrips dwindling international reserves. Recent policy measures by the government, including a rise in gasoline prices, fail to meaningfully address the imbalances. A default increasingly appears to be a question not of “if,” but “when.”

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China’s Symbolic Currency Win

by Robert Kahn

Earlier today, the International Monetary Fund (IMF) Board approved the inclusion of the Chinese renminbi (RMB) as a fifth currency in the special drawing rights (SDR), the IMF’s currency, as of October 2016.  The move was expected and IMF Board approval was never in doubt once the U.S. government signaled that it would not oppose the step. My read is that the Fund staff acted properly in arguing that the RMB now meets the test of being freely useable for international transactions by its members (though some have argued that the IMF was bending its rules for political reasons). Of course, Chinese financial markets remain significantly restricted for private investors, but the SDR’s current primary use is for transactions between members of the IMF (governments). From that narrow perspective the RMB can be judged to be widely used and widely traded because a country receiving RMB as a result of IMF transactions should be able to switch it to any other basket currency at low cost, at any time of the day or night, somewhere in the world. So too perhaps are more than a dozen other currencies freely useable by this measure, but the SDR is for now limited to the largest of those currencies by a separate (export share) measure. Consequently, next year the RMB goes into the basket with a weight of 10.9 percent (compared to today’s weights, most of China’s share comes from the U.S. dollar which will retain a 41.7 percent share; the other shares will be 30.9 percent for the euro, 8.3 percent for the yen, and 8.1 percent for the pound sterling).

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G20: Preparing for the Next Crisis

by Robert Kahn

The leaders of Group of Twenty (G20) meet this weekend in Antalya, Turkey. The agenda is long, the ambitions are modest, and it is easy to be cynical that the group has outlived its usefulness. Still, the meeting matters in a number of respects: strengthening relationships among leaders of the most important economies, providing momentum to ongoing reform initiatives, and pushing forward work on issues as diverse as climate change and tax avoidance. The most important task for the group though will be preparing for future crises, because it is at those times that G20 leadership is most critical. The G20 will have some satisfaction that serious economic shocks were weathered in 2015. In 2016, when China leads the G20, the story could be different.

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Are We Ready for the Next Emerging Market Crisis?

by Robert Kahn

This summer’s market turmoil was a serious jolt to emerging markets, particularly commodity exporters and those countries with strong trade and financial ties to China. Fortunately, there are good reasons for comfort that the tail risks facing these countries do not rise to the level of the Asia financial crisis or the Great Recession. After early missteps, China’s policymakers have been more assured in recent weeks in signaling their commitment to near term stability and support for growth. Financial distress in emerging markets, the most serious channel for contagion, has yet to materialize. Moreover, bolstered by high reserve levels, more flexible and competitive exchange rates (see chart) and in some cases better policies, emerging market buffers against contagion have been strengthened.

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The International Economic Agenda Facing the New Congress

by Robert Kahn

The initial post-election talk is understandably about whether the shift to a Republican controlled Senate makes it easier or harder to make progress on central economic challenges facing the United States, including energy, immigration, social spending, and infrastructure. There is understandable concern that this next Congress will face the same gridlock that we have now. But even before that, there is the mundane issue of what we borrow and spend. Partly out of fear of being seen as crying wolf one too many times, I have been wary to advertise my concern that we are facing a new series of economic cliffs. First up is a likely standoff on the budget (in December, and likely again in the spring of 2015). Then comes the debt limit, which will be reset on March 15, but given the usual and not-terribly-extraordinary “extraordinary measures” that are at the disposal of Treasury, they can likely pay the nation’s bills until perhaps the fall of 2015 before cash balances fall to zero. Of course, in the past deals have been done, often at the last minute, and we have not, with the exception of the 2013 government shutdown, gone off the cliff (though there have been a few unnecessary fender benders along the way). But with the Senate as polarized as ever, it is easy to see getting to deals on these issues will be difficult and potentially unsettling to markets.

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The Geopolitical Paradox: Dangerous World, Resilient Markets

by Robert Kahn

Should we be worried by how well global markets are performing despite rising geopolitical volatility? I think so. In my September monthly, I look at the main arguments explaining the disconnect, and argue Europe is the region we should be most worried about a disruptive correction. Here are a few excerpts.

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China Chooses Growth Over Reform

by Robert Kahn

The Wall Street Journal piece on rapid credit growth in China yesterday describes the sharp tradeoff for the Chinese government: achieving growth targets in the near term comes at the expense of reform delays and further rapid debt accumulation. With growth likely to decelerate in 2015 without additional stimulus, the prospects for meaningful economic reform are receding. I’ve explored this tradeoff in my July Global Economics Monthly (here). Imposing hard budget constraints, tightening credit, recognizing losses, and addressing massive excess capacity in real estate, raw materials and other sectors is disruptive in the short term, and as long as growth is falling short of government targets the hard decisions are likely to be deferred. If it takes a crisis to force change, I argue in the GEM that the smooth rebalancing scenarios that China optimists predict will be at risk.

BRICS and Mortals

by Robert Kahn

Leaders of the BRICS–Brazil, Russia, India, China, and South Africa–meet in Rio today to swap World Cup stories and launch a long-discussed “BRICS Bank.” The bank creates two funds–a development lending facility (New Development Bank or NDB) backed by $50 billion in capital ($10 billion from each of the BRICs), and a $100 billion rescue fund (Contingent Reserve Arrangement, CRA) for countries suffering from exogenous shocks.

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