In a wide-ranging interview with Euromoney, Gordhan expressed exasperation over the Fed’s resolutely domestic focus of its monetary stance, both in its quantitative-easing programme and communication policy, amid an apparent breakdown of international monetary coordination.
“The origins of what we have [the EM rout] now is, in the first instance, the quantitative easing (QE) that the Fed undertook since the financial crisis,” the minister said, adding it is in the Fed’s interest to help stabilize emerging financial systems, without specifying concrete policy measures.
“In the period 2008 to almost 2012, it was the emerging markets that were carrying global growth and providing the impetus that ensured that the world did not sink into a full depression – in addition to the kind of measures taken to secure the financial sector in the US.”
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Emerging market (EM) currencies of deficit nations have fallen to post-crisis lows against the dollar while stocks are in bear trading territory, amid fears over Fed tapering and broader macro-economic concerns, including weaker EM growth and the tightening of liquidity conditions in China, among other factors. India, Turkey and South Africa have been forced to engage in pro-cyclical monetary tightening to stabilize besieged currencies this year, and correct imbalances, as the Fed presses ahead with its tapering programme.
On Wednesday, the Fed announced its decision to taper QE by another $10 billion, without any mention of EM volatility in its FOMC statement.
Gordhan’s comments echo Reserve Bank of India governor Raghuram Rajan’s calls on Wednesday for greater monetary policy coordination. In an interview with Euromoney in September, Tharman Shanmugaratnam, the finance minister of Singapore, warned of a perpetual credit boom/bust cycle in Asia unless the US Federal Reserve looks beyond its domestic employment-inflation mandate.
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| Finance minister Pravin Gordhan |
Gordhan warned the Fed had sowed the seeds of prolonged EM volatility since the summer thanks to its apparent miscommunication. “The miscommunication in May – which we thought had already, in a sense, prepared the markets for what was to come – also indicated that there is a fascinating lack of awareness, and sometimes awareness, that we live in an interconnected world.
“So when it comes to issues of trade and market share and geopolitical issues, the US is very aware that we have an interconnected world. But when it comes to recognizing the spill-over effects of its actions, both positive and negative, then there is less of an awareness.”
In a multipolar world, the Fed, G20 and IMF need to redouble efforts to innovate policy tools to stabilize EMs akin to coordination that took root in the post-Lehman rout, said Gordhan, adding: “Greater recognition needs to be given, as we move towards the G20 meeting in Sydney later in February, to the need to re-ignite coordination, to put the spill-over effects back on the agenda, and to come up with some imaginative answers to ensure that emerging markets are not at the receiving ends of the kind of fluctuations that we are seeing.”
Gordhan drew attention to the geopolitical fallout from the US’s unilateral “your currency, our problem” policy stance.
“There has been totally inadequate discussion at a multilateral level to determine what would suit all of the parties concerned,” he said. “Perhaps if we gave ourselves the opportunity, we might have come up with some imaginative answers, rather than regard it as a sovereign issue, which the holder of the reserve currency doesn’t have the privilege of doing.”
Analysts interviewed by Euromoney rejected the view that Fed erred in neglecting to mention EM volatility in its recent statement and backed the tapering programme, citing the limited connection, at present, between the rout and the Fed’s dual inflation/employment mandate.
However, Ed Yardeni, of the eponymous research outfit, said in the coming months EM woes might temper Fed tapering as the subsequent relative strength of the dollar “could push US inflation closer to zero”, compared with its 2% target.
South African policymakers express exasperation over the sudden shift in market sentiment over EM fundamentals, underscoring the volatility of financial markets, with limited policy redress.
While there is perennial fear over a sudden lurch to the left in economic policy, South Africa has broadly won the backing from the IMF for its post-apartheid policy stance, based on a relatively tight fiscal policy, privatization, an inflation-targeting monetary framework and flexible “shock-absorbing” exchange rate.
However, the country remains chronically exposed thanks to its structural current-account deficit, traditionally financed by hot money, rather than employment- and productivity-enhancing FDI flows, while the rand remains a high-beta proxy for EM risk, in part thanks to the central bank’s inflation-, rather than FX-, targeting policy.
Centre-right economists argue South Africa needs to liberalize its labour market, improve educational standards to attract foreign investment and accept divergent global monetary policies are a fact of life.
However, Gordhan emphasized that EM fundamentals, including that of South Africa, are still sound. “Fundamentals in many of the emerging-market economies are still sound.
“It is wrong to change the narrative in a way in which it would appear that emerging markets are the only ones confronted with challenges that require structural reform. The western and developed countries have had those challenges before 2008 and after 2008, and some of them have actually done very poorly.”
He adds: “Structural reform is a challenge that all of us face as economies: developed and emerging. It’s a function of a changing world.”
“These [inflow boom/bust] cycles seem to be happening very quickly. In the 2008 to 2012 cycle, it was the emerging markets which were providing the growth dynamic. Now, because you have slightly better growth in the west, it doesn’t mean that emerging markets are all basket cases.”
The finance minister feared market pressure for pro-cyclical policy measures, such as interest-rate hikes and fiscal tightening, could exacerbate the toll on the real economy.
“We must now be given the space and the opportunity to correct those [fiscal] numbers without engaging in austerity, which is self-defeating and damaging to a large part of our population that still requires state assistance in order to overcome the legacies of apartheid,” Gordhan concludes.