Credit Manager Magazine 2/2022

International Monetary Fund Blog IMFBlog is a forum for the views of the International Monetary Fund (IMF) staff and officials on pressing economic and pol- icy issues of the day. The IMF, based in Washington D.C., is an organization of 190 countries, working to foster global mone- tary cooperation and financial stability around the world. The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board. verse feedback loops for such economies, as the IMF highlighted in its October releases of the World Economic Outlook and Global Financial Stability Report. Difficult tradeoffs Some emerging markets have already started to adjust monetary policy and are preparing to scale back fiscal support to address rising debt and inflation. In response to tighter funding conditions, emergingmarkets should tailor their response based on their cir- cumstances and vulnerabilities. Those with policy credibility on containing inflation can tighten monetary policy more gradually, while others with stronger inflation pressures or weaker institutions must act swiftly and comprehensively. In either case, responses should include letting currencies depreci- ate and raising benchmark interest rates. If faced with disorderly conditions in foreign exchange markets, central banks with suffi- cient reserves can intervene provided this in- tervention does not substitute for warranted macroeconomic adjustment. Nevertheless, such actions can pose difficult choices for emerging markets as they trade off supporting a weak domestic economy with safeguarding price and external stabili- ty. Similarly, extending support to businesses beyond existing measures may increase cred- it risks and weaken the longer-term health of financial institutions by delaying the recogni- tion of losses. And rolling back those meas- ures could further tighten financial condi- tions, weakening the recovery. To manage these tradeoffs, emerging mar- kets can take steps now to strengthen policy frameworks and reduce vulnerabilities. For central banks tightening to contain inflation pressures, clear and consistent communica- tion of policy plans can enhance the public’s understanding of the need to pursue price stability. Countries with high levels of debt denominated in foreign currencies should look to reduce those mismatches and hedge their exposures where feasible. And to reduce rollover risks, the maturity of obligations should be extended even if it increases costs. Heavily indebted countries may also need to start fiscal adjustment sooner and faster. Continued financial policy support for busi- nesses should be reviewed, and plans to normalize such support should be calibrat- ed carefully to the outlook and to preserve financial stability. For countries where cor- porate debt and bad loans were high even be- fore the pandemic, some weaker banks and nonbank lenders may face solvency concerns if financing becomes difficult. Resolution re- gimes should be readied. Commitments and confidence Beyond these immediate measures, fiscal policy can help build resilience to shocks. Setting a credible commitment to a medi- um-term fiscal strategy would help boost in- vestor confidence and regain room for fiscal support in a downturn. Such a strategy could include announcing a comprehensive plan to gradually increase tax revenues, improve spending efficiency, or implement structural fiscal reforms such as pension and subsidy overhauls (as described in the IMF’s October Fiscal Monitor). Finally, despite the expected economic re- covery, some countries may need to rely on the global financial safety net. That may in- clude using swap lines, regional financing ar- rangements, and multilateral resources. The IMF has contributed with last year’s $650 bil- lion allocation of Special Drawing Rights, the most ever. While such resources boost buffers against potential economic downturns, past episodes have shown that some countries may need additional financial breathing room. That’s why the IMF has adapted its financial lend- ing toolkit for member nations. Countries with strong policies can tap precautionary credit lines to help prevent crises. Others can access lending tailored to their income level, though programs must be anchored by sus- tainable policies that restore economic stabil- ity and foster sustainable growth. While the global recovery is projected to continue this year and next, risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerg- ing economies should prepare for potential bouts of economic turbulence. 63 CREDIT MANAGER MAGAZINE LUTY / FEBRUARY 2022 ANALYSIS “Average gross government debt in emerging markets is up by almost 10 percentage points since 2019 reaching an estimated 64 percent of GDP by end 2021, with large variations across countries.” “For central banks tightening to contain inflation pressures, clear and consistent communication of policy plans can enhance the public’s understanding of the need to pursue price stability.”