IMF: ‘Bumpy’ road ahead for emerging economies

The world’s lender of last resort, the International Monetary Fund (IMF), has said up-and-coming nations must do more to weather the fallout of weaker global growth and a slowdown in China’s economy.

The IMF’s managing director, Christine Lagarde, on Tuesday warned the emerging countries of the world that the road ahead could be “somewhat bumpy,” and urged them to be “vigilant for spillovers” from China’s slowdown, tighter global credit conditions and the prospect of an interest rate hike in the United States.

Lagarde also cautioned that global growth this year would be lower than previously anticipated. In July, the IMF forecast global economic expansion would reach 3.3 percent, slightly below last year’s 3.4 percent.

“Overall, we expect global growth to remain moderate and likely weaker than we anticipated last July,” Lagard told university students at the start of a two-day visit to Indonesia’s capital, Jakarta.

Emerging markets from Indonesia to Brazil have been especially hit by the slowdown in the world’s second largest economy, China. A slump in Chinese demand for commodities – a main staple of emerging economies exports – has stifled their growth and send their currencies reeling.

More trouble ahead

Lagarde said the IMF expected China’s economy to slow in the months ahead, although not sharply or unexpectedly, as it adjusts to a new growth model.

“The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy,” she said. She did add however that Chinese rulers had the policy tools and financial buffers to manage the transition.

According to the IMF, emerging economies are also facing weaker capital inflows than in years past because of a likely interest rate hike in the United States causing investors to re-direct financial investments. The US rate hike, expected for later this year, will also tighten global credit conditions, making re-financing costlier for states and businesses.

In the opinion of the IMF director, at least Indonesia was “better prepared than ever before” to face the global headwinds. Southeast Asia’s largest economy had the “right tools to actually react,” as it had sound public finances and a relatively small deficit, she told journalists, following a meeting with the country’s president Joko Widodo.

source: Reuters