The Global Financial Stability Report that was released by the International Monetary Fund (IMF) on Tuesday makes for grim reading.
IMF says that global financial stability has deteriorated further and that the global credit crunch is likely to be deep and long-lasting, despite the thawing of some short-term credit markets.
Illustration: Jayachandran / Mint
The multilateral lender has raised its estimates for losses from the global financial crisis to $4 trillion—from earlier estimates of $1.4 trillion in the earlier edition of the biannual report published in September and the $2.2 trillion in the January update. However, these earlier estimates were only for assets originated in the US while this time around, IMF has also taken assets originated in Europe and Japan into account (with these two regions originating $1.3 trillion of the assets that will need to be written down).
The deleveraging that began last year is still on as financiers try to sell assets and cut borrowings. The implication of this for emerging markets is very serious—lower capital flows. IMF predicts that “emerging markets could see net private capital outflows in 2009 with slim chances of a recovery in 2010 and 2011”. In other words, the flood of global money that gushed into emerging markets in recent years has receded for a long time. Private capital flows to emerging markets peaked in 2007, at 5% of emerging markets’ gross domestic product (GDP).
Obviously, countries with large current account deficits that have to be financed with global capital should worry.
The problem will be very acute in East Europe, where current account deficits above 4% of GDP are common, going into double digits in the case of countries such as Bulgaria and Serbia. East Europe looks like dynamite on a short fuse. India, too, has a large current account deficit compared with most other Asian countries. IMF predicts that it will be around 2.5% of India’s GDP in 2009, a significant risk at a time when capital inflows are drying up. India has already reported its first balance of payments deficit in many years, which means that the foreign capital flowing into the country is not enough to finance the current account deficit.
Our view is that the current account will not deteriorate in 2009. In fact, it may even improve if the economy continues to be sluggish and global oil prices decline. But the risk of running a large current account deficit in such times must not be ignored.
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