Russian President Vladimir Putin (L) greets US President Barack Obama during an official welcome of G20 heads of state and government, heads of invited states and international organizations at the G20 summit on September 5, 2013 in St. Petersburg, Russia.
Leaders of the world’s biggest economies at a Group of 20 summit in Russia grappled with threats to the global economy as the effects of the Syrian conflict added to the fallout from a potential stimulus exit.
The BRICS countries pledged yesterday in St. Petersburg to create a $100 billion pool of currency reserves to guard against shocks even as Russia said U.S. President Barack Obama sought to ease concern about an abrupt pullback. Chinese and Italian officials warned that military intervention in Syria would risk harming the global economy.
Emerging markets, which helped pull the world out of a recession after the global financial crisis, now face an exodus of cash and sliding currencies in anticipation of the U.S. Federal Reserve’s eventual tapering of its $85 billion in monthly bond purchases in its most recent quantitative easing program. The prospect of U.S. military strikes against Syria is also adding to volatility as investors gauge whether oil flows from the region will be disrupted.
“The tapering of QE will dominate the agenda,” Victor Bark, who oversees about $2.8 billion as the head of asset management at Alfa Capital in Moscow, said by phone. “The U.S. won’t look at the situation in emerging markets -- they’ll act based on their own interests.”
China will contribute $41 billion to a pool of BRICS reserves, with Russia, India and Brazil each adding $18 billion and South Africa providing $5 billion, according to a statement issued yesterday.
[h=2]Major Challenge[/h]An exit from monetary-easing policies poses a major challenge for the world economy, Chinese Vice Finance Minister Zhu Guangyao told reporters yesterday as the two-day forum opened. Developed economies are turning into global growth engines as some emerging-market counterparts decelerate, the International Monetary Fund said in a report for G-20 leaders.
German Chancellor Angela Merkel urged central banks to curb expansive policies, saying that scaling back monetary stimulus will be “necessary, step-by-step.” The BRICS countries, which also agreed to seed a new development bank with $50 billion of capital, are seeking a shield against “unintended negative spillovers” from unconventional monetary policies in developed economies, according to the statement.
“New risks have emerged in recent months,” Russian President Vladimir Putin said in opening remarks at the forum. “Our partners have started to exit unconventional financial and economic policies. That can take a toll on key global risks and impact economies of other countries.”
[h=2]Obama’s Reassurance[/h]Obama told the G-20 leaders that any pullback would be gradual, Russian Finance Minister Anton Siluanov told reporters.
“It was said that such scaling back will be implemented within reasonable limits,” Siluanov said. “That’s absolutely right. Most countries with developing economies spoke out from the point of view of the necessity of conducting balanced steps in reducing these policies.”
European Central Bank President Mario Draghi said yesterday the monetary stance for the euro area will remain accommodative for as long as necessary, with the benchmark interest rate “at present or lower levels for an extended period of time.”
[h=2]Emerging Markets[/h]The MSCI Emerging Markets Index has lost 10 percent this year, compared with a 12 percent gain in the MSCI World Index, amid speculation the Fed will start trimming its bond-buying program after a meeting this month. The developing-nation index trades at 10.1 times projected 12-month earnings, trailing the MSCI World’s 13.7 times, data compiled by Bloomberg show.
“Most of the countries among emerging markets are facing the problem of capital outflow because of tapering of QE,” Indonesian Finance Minister Chatib Basri said in an interview yesterday in St. Petersburg. “So the issue is more how do we adjust. And I think the role of the G-20 is very important here because the leaders can also communicate about the plan.”
Obama, who has asked Congress to endorse a punitive strike on Syrian President Bashar al-Assad’s forces after an alleged chemical attack on civilians, is trying to enlist international support at the G-20 meeting. Italy and Germany have joined Russia and China in insisting they won’t support military intervention without United Nations Security Council approval.
[h=2]‘Need Stability’[/h]Italian Prime Minister Enrico Letta said any such operation would cause volatility on financial markets. “We don’t need volatility, we need stability,” he said. “We are concerned about it.”
Brent may rise to $120-$125 a barrel if the U.S. and allies begin military action in Syria and may “spike briefly” to $150 if a U.S.-led attack on Syria sparks further conflict in the Middle East and supply disruptions, Michael Wittner, Societe Generale SA (GLE)’s New York-based head of oil market research, said in a report on Aug. 30.
“The concern for everyone is that a rise in oil prices would pose a risk to economic recovery,” Capital Economics Ltd. economist Julian Jessop, said by phone from London yesterday. “It remains to be seen if the current rate of growth will continue if oil prices stay at today’s levels or even rise.”
BRICS nations discussed the risk posed by a Syrian strike on the sidelines of the G-20 summit, Putin’s spokesman Dmitry Peskov said. They agreed that it would lead to an “extraordinary negative influence on the economy,” he said.
[h=2]Oil Price[/h]Capital Economics’ Jessop calculates that in the worst-case scenario, a jump to $150 a barrel, would threaten “stagnation” by knocking 1 percentage point off international expansion.
China’s Zhu said his country is in consultations with the IMF on the fallout from Syria and cited the Washington-based lender’s forecasts that a $10 per barrel increase in oil would wipe a quarter percentage point off global growth.
“The emerging economies are slowing down and the tapering of advanced economies’ central banks certainly isn’t helping them,” Domenico Lombardi, the director of the Global Economy program at the Waterloo, Ontario-based Centre for International Governance Innovation, said in St. Petersburg. “That being said, there is very little that can be done.”
Emerging-market stocks rose to a two-week high, led by Indian lenders, and the rupee rallied after the nation’s new central bank governor outlined plans to bolster the financial industry. The MSCI Emerging Markets Index climbed 1 percent to 946.20 yesterday.
[h=2]Growth Recovery[/h]Emerging-market economic growth recovered in August from the first contraction since 2009 as business conditions improved in China and Russia, offsetting declines in Brazil and India, HSBC Holdings Plc (HSBA) said yesterday, citing a survey of purchasing managers.
“One or two years ago, the emerging economies were complaining about appreciating exchange rates, now they’re complaining about the opposite,” Lombardi said. “It’s also up to the emerging economies to constantly upgrade the soundness of their macroeconomic framework.”
Policies of “giving out free money couldn’t continue forever,” Putin said, adding that the deployment of monetary stimulus helped support economic growth and cap volatility on financial markets.
“Some of the big emerging economies are now growing under their growth potential,” European Commission President Jose Barroso said. “But I’m confident that it will be possible to bring emerging economies back to their growth potential precisely if we act together and if they address also some of the problems they have identified themselves.”
To contact the reporters on this story: Stepan Kravchenko in St. Petersburg at [email protected]; Henry Meyer in St. Petersburg at [email protected]; Anatoly Temkin in St. Petersburg at [email protected]
To contact the editor responsible for this story: Balazs Penz at [email protected]
