Robert Kahn

Macro and Markets

Robert Kahn analyzes economic policies for an integrated world.

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Showing posts for "Emerging Markets"

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’s Descent Into Crisis

by Robert Kahn

In my May monthly, I make the case that the crisis in Venezuela has intensified to the point where a chaotic default is a question of when, not if. Economic activity is falling sharply and the seeds of hyperinflation have been planted, a downward spiral reinforced by political paralysis, widespread electricity shortages, and a breakdown in social order. Reserves are falling sharply, driven by capital flight and a fiscal deficit that has swelled to over 20 percent of gross domestic product (GDP). Although the government has made enormous efforts to continue making debt payments, a default now appears likely sooner rather than later, and possibly even ahead of large debt service payments due this fall

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Macri-economics in Argentina

by Robert Kahn and Ted Liu

While markets have focused attention on China as the primary source of market risk in 2016, Latin America has provided the more significant headlines in recent weeks.  Political turmoil in Brazil has resulted in the resignation of a market-friendly finance minister, and default looms in Venezuela.  But perhaps nowhere in Latin America is more at stake than with the economic revolution now underway in Argentina.

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European Central Bank Rate Move, a Turning Point for Europe

by Robert Kahn and Ted Liu

At the governing council’s meeting today, the European Central Bank (ECB) announced that it will cut benchmark deposit rate to -0.3 percent, extend its quantitative easing (QE) program to at least March 2017, and broaden the scope of assets purchased. On several occasions since October, ECB President Mario Draghi has hinted an easing was coming, stating that the central bank will do what they must to “raise inflation and inflation expectations as fast as possible.” There is a strong economic case for action: inflation has stalled at levels well below the ECB’s target inflation rate of below but close to 2 percent (headline inflation in October was 0.1 percent), growth remains weak, and unemployment rates are still sky high. But, as in the United States, there are growing doubts about how much a boost of QE will provide to the European economy. A few thoughts on why the ECB’s move still matters.

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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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Ukraine’s IMF Program Sets Stage for Debt Restructuring

by Robert Kahn

The IMF yesterday approved a four-year, $17.5 billion arrangement for Ukraine, their contribution to a $40 billion financing gap that they have identified over that period. A further $15 billion is to come from a restructuring of private debt, with formal negotiations expected to begin soon. The rest is expected to come from governments and other multilateral agencies. An ambitious array of reforms—including to fiscal and energy policy, bank reform, and strengthening the rule of law—are laid out, signaling a dramatic break from past governments. These measures are expected to set the stage for recovery: output falls 5 ½ percent this year before 2 percent growth returns in 2016, inflation will average 27 percent this year and then decline, while the current account deficit falls to 1 ½ percent and the currency stabilizes around current levels. Public sector debt will peak at 94 percent of GDP in 2015 as the program takes hold. All this depends on an end to the current hostilities, which as the IMF notes remains a considerable risk to the program.

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The Meaning of Ukraine’s IMF Deal

by Robert Kahn

While today’s headlines focus on the truce agreement between Ukraine and Russia, a significant economic milestone was achieved yesterday with the IMF’s announcement that its staff has reached agreement with the government on a new four-year program. The Fund’s Board will likely consider the program next month. Whether or not the truce holds, the program is the core of western financial support for Ukraine. Is it enough?

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