IMF Latest: Gopinath Sees Rocky Ride On Dollar, No Plaza 2.0

(Bloomberg) -- The current head of the Group of 20 called monetary policy through interest-rate changes a “wide-spectrum antibiotic” that is effective in curing inflation but carries side effects. 

“It’s like a real medicine to cure inflation but has a huge excess negative,” not only for major countries such as the US where the Federal Reserve is aggressively raising interest rates, but for other nations too, Indonesian Finance Minister Sri Mulyani Indrawati said. “It’s becoming so strong that the medicine to curb the inflation can have huge side effects for many other countries.” 

Speaking at an event at the Institute of International Finance Friday, she urged developing and emerging nations to do all they can to strengthen their domestic economies. 

“Try to create a cushion,” because the dynamics currently pressuring economies are going to intensify in 2023, Indrawati said. Coordinating fiscal and monetary policy with other facets such as trade and investment policy “is going to create more credibility and effectiveness in managing” the situation “without worsening the inflation,” she said.

The IIF and International Monetary Fund are holding their annual meetings this week, bringing global finance and central bank chiefs -- along with their development and banking counterparts -- to the US capital at a fragile moment for the global economy. 

Even after the misery of this year -- surging inflation, war in Ukraine, China’s slowdown -- Bloomberg Economics expects next year could be even worse. The IMF on Tuesday cut its forecast for worldwide growth in 2023 and said that policies to tame high inflation may add risks to the global economy. Even President Joe Biden said this week that the US, the world’s biggest economy, could suffer a “very slight” recession.  

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BNP Paribas Head Sees EU Firms Adapting to Inflation (10:45 a.m.) 

The economic situation in Europe is a “challenge, not a crisis,” according to the chairman of French lender BNP Paribas SA.

While inflation is increasing pressure on businesses, they are “working very hard to adapt” to higher prices and interest rates, Jean Lemierre told a panel at the Institute of International Finance conference. “They go through difficult months, it is challenging, but they will get it done.” Meanwhile, European Central Bank policymakers are “doing what they need to do,” said Lemierre, a former member of the European Monetary Committee.

China Hurting Itself With Zero Covid, Rajan Says (10:30 a.m.) 

The Chinese are “hurting themselves” with their Zero Covid policy, former India central bank Governor Raghuram Rajan said.

“The question is how they move on, given that it is so closely associated with President Xi,” he said in an interview with Bloomberg Television. “The real question is -- what happens with China after this? How do they find a way out of this or do they buy western vaccines and start vaccinating the population with effective vaccines? That’s the real question for them because they cannot continue this strategy forever.”

While many larger emerging markets have built up foreign-exchange reserves in the era of easy money, smaller developing nations are “on the brink” of default amid rising food and energy prices, Rajan also said. “They simply cannot service their debt and help their people at the same time,” he said. 

Gopinath Sees Rocky Ride on Dollar, No Plaza 2.0 (9:14 a.m.)

Nations are in for a “rocky ride” as they adjust to dollar strength, the International Monetary Fund’s First Deputy Managing Director said, adding that she doesn’t see a new currency plan along the lines of the 1985 Plaza Accord. 

“There are fundamentals that are driving these large movements,” Gita Gopinath said on Bloomberg Television Friday, citing tighter monetary policy and high energy prices. “This is going to be a bit of a rocky ride for countries, but they will have to adjust to it so they have to use their own monetary policy tools to be able to keep inflation restricted.”  

The US currency has soared almost 15% this year, on course for the biggest gain since the early 1980s. Nations across Asia and Latin America have been tapping their foreign reserves in an effort to shore up their currencies, prompting a caution from the IMF about the need to be prudent and preserve resources for potentially worse turmoil to come.  

Gopinath said she doesn’t foresee a repeat of actions in 1985, when the world’s top industrial powers came together to rein in the dollar in what became known as the Plaza Accord. 

“That’s not where we are. Frankly, when the Plaza Accord worked at all, it was not just because there were announcements on currencies, but there was more signaling of coordination of other kinds of fiscal and monetary policies. So no, I don’t think we’re going to have a Plaza Accord any time soon.”

IMF Urges FX-Reserve Preservation on Dollar Surge (8:36 a.m.)

Governments need to hold on to their foreign exchange holdings for potentially worse bouts of outflows and market volatility in the future even as the dollar surges, according to the International Monetary Fund.

The warning came in a blog post by the IMF’s Gopinath and the fund’s chief economist, Pierre-Olivier Gourinchas, who urged governments to reinstate swap lines with advanced economy central banks or avail of the IMF’s precautionary lines to ensure they have liquidity. While temporary interventions can be appropriate, other reforms will be needed, the duo said. 

“Those with large foreign-currency debts should reduce foreign-exchange mismatches by using capital-flow management or macroprudential policies, in addition to debt management operations to smooth repayment profiles,” the IMF officials wrote. Around half of all cross-border loans and international debt securities are denominated in dollars, they wrote. 

IMF Urges Africa Oil Producers to Ready for ‘Shock-Prone World’ (7:10 a.m.) 

Oil producers in sub-Saharan Africa should target fiscal surpluses to buffer themselves against large price shocks, lower their debt risks and manage the transition away from fossil fuels, according to the International Monetary Fund.

“We are in a much more shock-prone world,” Catherine Pattillo, the deputy director of the lender’s African Department, said in an interview in Washington. 

To better prepare for sharp price swings -- the cost of crude fluctuated from lows of $23 per barrel to a peak of $115 over the last two years alone -- countries should “during good times think about saving and aiming for manageable fiscal surpluses,” Pattillo said. 

Morocco Set to Scrap Bond Market Return, May Tap IMF Credit Line (5:48 a.m.)

Morocco is set to shelve a planned issue of a sovereign bond this year and may draw instead on its credit line with the International Monetary Fund, according to a person with knowledge of the matter, as the government looks for a cheaper way to repay debt maturing in December.

The kingdom is considering tapping around $1 billion from the IMF because the surging cost of dollar debt makes borrowing unattractive this year, according to the person, who is directly involved in the discussions but not authorized to speak publicly.

Morocco was previously planning its first issuance abroad since 2020 around the time its $1.5 billion bond comes due in December. The central bank and the Finance Ministry didn’t reply to emailed requests for comment. 

IMF Sees China Covid Zero Exit in 2023, Calls for More Stimulus (11:01 p.m. Oct. 13)

China may not move away from its stringent Covid Zero policy until the second half of next year, according to the International Monetary Fund’s top official in the country, who also called for more monetary and fiscal stimulus to support the economy. 

The IMF assumes conditions for lifting the zero-tolerance approach to combating Covid infections will be in place by the latter half of next year, Steven Barnett, the senior resident representative in China, said in an interview on Friday with Bloomberg TV’s Shery Ahn and Haidi Lun. 

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