The Group of Twenty (G-20) meet has been a pleasant surprise, with more than the expected boost for the International Monetary Fund (IMF) and the pledge of $250 billion (around Rs12.6 trillion) for a fund for trade finance.
The increase in IMF’s resources and the creation of an extra $250 billion worth of special drawing rights (SDR), which can be used by cash-strapped countries facing a shortage of hard currencies, will help countries in eastern Europe and others such as Pakistan pay for their imports.
The SDR issue is thus a lifeline for weak economies, while the extra funds for IMF will also serve the same purpose. The additional comfort available to eastern Europe will also help European banks that had lent to these countries and European governments that may otherwise have had to bail out their banks.
The impact of all this was clearly seen in the foreign exchange markets on Thursday, with the US dollar index falling, and the euro and emerging market currencies gaining strength. Part of the euro’s gain, though, was on account of the lower than expected rate cut by the European central bank.
But the failure to convince Europe about the need for another fiscal push should also be negative for the dollar. Aside from this currency effect, however, the SDR increase does little for the stronger emerging markets with high currency reserves such as China and India.
But the trade finance package could help exporters in all emerging markets. Short-term trade finance had dried up during the last quarter, as a result of which exporters could not roll over their borrowings and had to repay them.
The Indian balance of payments data for the December quarter, for example, showed a capital outflow of $3.1 billion on account of trade credits being repaid. While the situation has improved since then, the idea is to help exporters get access to trade finance on easy terms through export credit and investment agencies and through multilateral financial institutions such as the World Bank. Banks in emerging markets can get lines of credit from the World Bank.
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While this will help exporters, the real reason for the decline in trade is lower demand and there was no agreement at the G-20 meeting on a coordinated fiscal stimulus. Nevertheless, markets in Asia held on to Thursday’s gains, interpreting the G-20 announcements as favourable to emerging markets.
Of course, much depends on how soon these promises are translated into reality. But other things remaining equal, the support to IMF and to trade finance lowers emerging market risk, as is evident from the gains in emerging market stocks and currencies.
The trouble is, other things may not remain equal, and these measures do little to address either falling demand in the developed nations or the toxic assets in the books of their banks.
Graphics by Sandeep Bhatnagar / Mint
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