IIF members and guests convened in Istanbul for the IIF's annual G20 event, held this year in cooperation with the Turkish G20 Presidency. Speakers included Bank of England Governor Mark Carney, Turkish Prime Minister Ahmet Davutoglu, Italian Finance Minister Pier Carlo Padoan, Chinese Vice Finance Minister Zhu Guangyao, and Turkish Deputy Prime Minister for Economic and Financial Affairs Ali Babacan.
2015 is shaping up as the year of divergence: mature economy growth accelerates while EMs lag behind; the Fed is set to hike rates while most other central banks are easing; the oil price drop benefits importers but hurts exporters; and Chinese growth slows as India is accelerating. The big picture across these divergent developments, however, remains a global economy that is slowly gaining speed with the U.S. and Euro Area in the driving seat.
After a rough ride in 2014, we expect 2015 to be another stressful year for capital flows to emerging markets. We project total EM inflows to decline further, after a substantial drop last year, as the Fed starts to raise policy rates and EM growth remains lackluster. Flows during the year are again likely to be volatile, as markets are affected by shifting expectations of the Fed’s policy trajectory, oil market uncertainty and political risks.
The sharp drop in oil prices since mid-2014 implies a sharp drop in capital outflows from oil exporters, including reserve accumulation. While in absolute terms the reduction in these “petrodollar” investments is expected to be greatest for flows into advanced economy government bonds, the impact on these large liquid markets is likely to be small relative to other factors such as shifts in central bank QE and cyclical developments. The most significant impact is likely to be felt in neighboring countries of major oil exporters.
The first full-year budget of the government of Prime Minister Modi makes meaningful progress in tax and subsidy reform, while bolstering needed development spending and expanding revenue sharing with states. Although fiscal consolidation is slowed, market borrowing and public debt remain on a declining trajectory. The reformist budget, falling inflation and the strong balance of payments should allow the central bank to continue with gradual monetary easing.
The Cross-Border Regulation Forum (including the IIF and other associations) submitted the industry’s response to IOSCO’s ‘Cross Border Regulation Consultation Report’on February 23.
IOSCO’s consultation covered the available ‘tools’ for greater regulatory co-ordination across national borders, most notably national treatment, recognition (deference) and passporting. The industry’s response has conveyed that there is no ‘one size fits all’ solution, but that recognition/deference generally offers the most advantages for policymakers and market participants alike.
