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There could be further pressure as a
result of fiscal consolidation. This
could be accompanied by accelerated
de-leveraging and savings resulting
into lower spending. Second is the
resulting increase in loan losses,
which could be the mortgage
portfolio of banks.
According to the report, the reasons
for the shock in emerging Asia could
probably be loan losses on account of
poor lending decisions in the past.
Furthermore, the corporate risk
premium attached to emerging Asian
economies is closely correlated with
the rise in the risk premiums in the
Euro zone and the United States,
which was also seen during the
collapse of the Lehman Brothers.
In such a scenario, the IMF report
says that global risk aversion would
rise sharply and funding rates for
banks and non-financial corporations
would shoot up to varying degrees.
Further, emerging market economies
would suffer from the slump in
commodity prices and a sudden
reversal in capital flows.
FALLING BACK IN RECESSION
Under the aforesaid scenario, given
the limited room for monetary and
fiscal policy in advanced economies
to respond vigorously, a serious
global slowdown would ensue, which
would undo much of the progress
since the end of the Great Recession.
Commodity prices and global trade
and capital flows are likely to decline
abruptly, dragging down growth in
the emerging and developing
economies. The US and the Euro zone
would fall back into recession.
As it happened in the 2008 crisis, the
cascading impact of lower economic
activities and falling confidence could
lead to further correction in the global
trade, commodity prices and the
Beyond Market 10th Oct ’11
equity markets could globally correct,
which essentially means the countries
with higher exposure to commodities
as a per cent of their overall economy
could suffer and drag the economic
growth down further.
BANKING: THE ROOT CAUSE
During 2008-09, the financial crisis
was due to the falling housing prices
and in turn increase in non
performing assets (NPAs) or erosion
in the bond portfolio led to banks and
financial institutions to default or ask
for support one after the other. The
latest IMF outlook report again
emphasizes on banks and the need for
adequate capitalization.
The IMF report said that stock prices
have fallen. These will adversely
affect spending in the months to
come. Indeed, the numbers for the
month of August indicate that this is
already being witnessed.
Low underlying growth and fiscal and
financial linkages may well feed on
each other and this is where the risks
are. Low growth makes it more
difficult to achieve debt sustainability
and leads markets to worry even more
about fiscal stability. Low growth also
leads to more non-performing loans
and weakens banks.
Downside risks are very real. Under
the most optimistic assumptions,
growth in advanced economies will
remain low for some time. During
that time, banks have to be
strengthened, not only to increase
bank lending and baseline growth, but
also to reduce risks.
EMERGING MARKETS
As seen in the recent months, the IMF
report says that the emerging markets
will have to deal with volatile capital
flows. Indeed, some are close to
overheating, although prospects are
more uncertain again for many others.
In its different risk scenarios, it feels
emerging markets may suffer more
adverse export conditions.
The IMF expects the world trade
growth in volumes to drop from
almost 13% in 2010 to 7.5% in the
current year and 5.8% next year. In
fact, exports growth from emerging
and developing economies will come
down drastically from 13.6% last year
to 7.8% next year.
Growth (%)
2009
2010
Exports
Advanced
Economies
–11.9 12.3
Emerging And
Developing
Economies
–7.7 13.6
World Trade
Volume
–10.7 12.8
Source - IMF
2011
6.2
9.4
7.5
2012
5.2
7.8
5.8
Low exports, coupled with lower
commodity prices could create
challenges for low income countries.
For the Indian economy it says that
real GDP growth could fall from
10.1% in calendar year 2010 to 7.8%
in the current year and 7.5% next
year. More importantly, it also
expects consumer prices to cool down
from the 2010 levels but will remain
at elevated levels around 8.6% till
next year.
In India, the IMF expects activities to
be supported by private consumption.
However, it feels that investments are
expected to remain sluggish,
reflecting, in part, recent corporate
sector governance issues and a drag
from the renewed global uncertainty
and less favourable external financing
environment. It also highlights that
the key challenge for policymakers is
to bring down inflation, which is
running close to double digitS.
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