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Dear maria, We just published a new blog—please find the full text below.  Asia Must Monitor Rising Corporate Debt Amid Higher Interest Rates (Credit: Ahmad Fauzan/iStock by Getty Images) By Thomas Helbling, Shanaka J. Peiris, and Monica Petrescu Asia’s increased borrowing in recent decades has augmented the region’s exposure to rising interest rates and heightened market volatility. Borrowing by the region’s governments, companies, consumers, and financial firms is well above levels prior to the global financial crisis, as we recently noted. In particular, industries that rapidly increased leverage while interest rates were low are now a key concern, especially in Asia. While we expect Asia’s growth to hold up, contributing two-thirds of global growth this year, central banks may keep rates higher for longer to tame inflation, and financial conditions may tighten further. Highly leveraged companies face greater risk of default as monetary policies and financial conditions remain tight. Even with resilient economic growth, interest payments may exceed earnings as borrowing costs rise, reducing firms’ ability to service their debts. As the Chart of the Week shows, corporate debt in Asia is concentrated in firms with low interest coverage ratios. When this ratio, a measure of how much corporate earnings can cover debt interest payments, is below or close to 1, a firm may become unable to service its debts. View the interactive version here. As of mid-2022, 17 percent of Asia’s corporate debt was held by firms with interest coverage ratios below one, and another third in firms with interest coverage ratios between one and four. China, India, and Thailand had greater concentrations of corporate debt in firms with interest coverage ratios below one, a level signaling susceptibility to default. The Philippines, Malaysia, and Hong Kong had large shares of debt in companies with coverage ratios just above one, which could potentially become susceptible to default with rising borrowing costs. Across the region, a common theme is that a significant share of firms in the property and construction sector have interest coverage ratios close to or below one. Cash buffers built up in recent years can provide a temporary reprieve against increasing interest rates, but may prove insufficient if borrowing costs remain higher for longer. Across the region, cash holdings are generally lower in firms with low interest coverage ratios, which are already more exposed to rising borrowing costs; in India, Indonesia, and Vietnam, cash holdings of such vulnerable firms are especially low relative to interest costs, leaving them at risk of insolvency. In addition, given high shares of short-term debt in Asia, even firms with ample stockpiles of cash may face severe pressures should credit conditions tighten and reduce availability of short-term loans. Financial stability focus The IMF monitors the evolution of these risks amid the prospect for higher for longer interest rate environment or a potential tightening of credit and financial conditions in the region. We recently visited the Philippines to join the central bank in hosting a conference on financial stability for Asia’s policymakers. Our gathering in Cebu, on the sidelines of a Financial Stability Board–Regional Consultative Group for Asia conference, convened regional central bankers and regulators to discuss systemic risk issues in the region and how to address them amid global bank stresses. Regional corporate debt vulnerabilities were part of the discussion. Financial supervisors must remain vigilant amid elevated uncertainty, high debt burdens, and rising debt service costs, and should recalibrate relevant macroprudential tools as needed to tackle pockets of vulnerability in the corporate sector. At the same time, central banks should separate monetary policy objectives from financial stability goals, using specialized tools such as liquidity and lending facilities to safeguard financial stability, while continuing to calibrate monetary policy to address inflationary pressures.   Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!

Japan Uncertainty Around Japan Inflation Underscores Need for Nimble Monetary Policy Photo Credit: Faina Gurevich/iStock by Getty Images Japan’s headline inflation reached a four-decade high in February as the economic recovery continued amid supportive monetary and fiscal policies and a surge in tourism. While lower energy prices reduced inflation in recent months, underlying momentum in core prices, which exclude fresh food and energy, has also strengthened further, reaching a four-decade high of 4.1 percent in April. Rapid price gains are rarely desirable, but Japan is an exception after bouts of deflation since the late 1980s and early 1990s. Now, there are three reasons for hope that the world’s third-largest economy is at a turning point and that the Bank of Japan may finally be able to sustain inflation around its 2 percent target: While inflation was initially triggered by the global energy and supply-chain crisis rather than strong underlying demand, there are increasing signs that price pressures are proving to be broader and more durable. The annual ‘shunto’ negotiations between labor unions and major companies signal agreement on larger-than-expected wage gains that better keep up with rising prices. Business surveys show a sustained increase in inflation expectations, which is likely to influence corporate price-setting. These factors, however, are accompanied by important caveats, which would make it difficult to sustain this inflation. The expected wage boost may not be enough as small and medium-sized enterprises that employ more than 70 percent of workers are less profitable and may not be able to afford sufficiently large pay increases. In addition, a weakening of the global economy could strengthen the yen, making exports less competitive and potentially returning Japan to low inflation or deflation. And household surveys indicate inflation expectations remain well below 2 percent. In our latest staff report, we project inflation to remain above the 2 percent target until the end of next year, driven by the continued surge in tourism and delayed effects of yen depreciation. Policy challenge The key challenge facing the Bank of Japan (BOJ) is how to durably achieve its inflation target without significantly overshooting while safeguarding financial stability. As the only major central bank with a negative interest rate, set at minus 0.1 percent, monetary policy remains ultra-accommodative with rising inflation. Under its yield curve control policy, the central bank has pledged to buy as many Japanese government bonds as needed to keep 10-year yields within its target range. This policy was largely successful since its 2016 introduction because investors perceived it to be a credible yield cap, reducing the need to buy as much to maintain it. That changed since the Federal Reserve and other central banks started raising interest rates last year, creating a yield gap that put heavy downward pressure on the yen. Investor speculation that Japan’s easing cycle would end forced the central bank to buy trillions of yen in bonds to defend the ceiling on yields, in turn destabilizing the market. The BOJ now owns more than 80 percent of outstanding 10-year government bonds. Given these rising costs associated with capping long-term rates, the central bank should allow greater flexibility in longer-term yields and allow market forces to play out. At the same time, with inflation risk in both directions, policymakers should maintain their accommodative stance by keeping the short-term policy rate unchanged until there’s more evidence that they can durably meet their 2 percent inflation target. Such added flexibility, makes monetary policy nimbler, reduces undesirable side-effects, and lessens the risks of derailing the economic recovery or undermining price stability. There are several ways that the BOJ could be more flexible. It could widen the target band around the 10-year rate enough for market forces to play a leading role, minimizing the need for its continued intervention in the bond market. It could keep short-term yields low—which are found to matter more for real economic activity—by capping a shorter-term rate instead, such as the 5-year rate. And it could shift from a yield target to a quantity-based purchasing objective to avoid the cost of defending a particular yield level. Policymakers must carefully assess the advantages and disadvantages of each approach as well as potential domestic financial stability implications, as we outline in our latest staff report. Global spillovers Japan has been the world’s largest net creditor for more than three decades, with external assets of $3.2 trillion, as years of low interest rates drove foreign investment to achieve higher yields. That means rising government bond yields could lure investors back to domestic assets and help to attract more investment from outside the country. That could hurt the valuation of overseas assets and put upward pressure on global yields by fueling foreign sales by Japanese or purchases of Japanese assets by foreigners, as seen in December when the BOJ surprised markets by increasing its target band around 10-year yields. Such spillover effects would likely be larger in countries where Japanese investors own a large share of local debt—this includes several euro area countries, Australia, and the United States. Clear communication of any changes to Japan’s monetary policy stance will be critical to mitigate potential unintended consequences and heightened market volatility.  Ultimately, monetary easing will need to be supported by other policies for Japan to finally achieve its 2 percent inflation target sustainably. This includes withdrawal of pandemic-related fiscal support, with any new measures limited and targeted to vulnerable households only, to avoid overheating the economy. It will also be helpful to boost personal income and purchasing power, such as by making it easier for workers to switch jobs and for women and seniors to join the workforce. Overcoming such structural barriers to wage growth will make it possible for the country to enjoy the benefits of a virtuous cycle of income and growth. **** Purva Khera is an economist for Japan in the Asia and Pacific Department. Salih Fendoglu is a senior financial sector expert in the Monetary and Capital Markets Department. RELATED LINKS Japan and the IMF Selected Issues Paper Staff Report

Dear maria, In today's edition, we highlight: US interest rates must stay high UK economy to escape recession Japan's inflation target The return of industrial policy Natural gas security

UNITED STATES Interest Rates Must Stay High To Defeat Inflation (Credit: f11photo/AdobeStock) The United States has proved resilient in the face of the significant tightening of fiscal and monetary policy, but interest rates will have to stay high until late next year to tame inflation in the world’s largest economy, IMF staff said in a statement on Friday. “Consumer demand has held up well, boosted initially by a drawdown of pent-up savings and, more recently, by solid growth in real disposable incomes,” staff said at the end of the country’s annual Article IV consultation. Prime-age labor force participation has risen above its pre-pandemic peak and real wages have been rising faster than inflation since mid-2022, they added. But the strength in demand and labor market outcomes is a "double-edged sword", contributing to more persistent inflation, the statement said. While core and headline PCE inflation are expected to continue falling this year, they will remain above the Fed’s 2 percent target throughout 2023 and 2024. “To bring inflation firmly back to target will require an extended period of tight monetary policy, with the federal funds rate remaining at 5¼–5½ percent until late in 2024.”

MANAGING DIRECTOR PRESS CONFERENCE Outlook For United States

Speaking at a press conference, IMF Managing Director Kristalina Georgieva said that the Fund was keen to see a resolution as soon as possible to the impasse over the debt ceiling. “We are now in the twelfth hour, so a good outcome for the US and the world economy is paramount,” she told reporters.

UNITED KINGDOM Economy To Dodge Recession (Credit: IR_Stone/iStock by Getty Images) The United Kingdom will avoid a recession and maintain positive growth in 2023, but economic activity has slowed significantly since last year and inflation remains stubbornly high, IMF staff said in a statement on Tuesday at the end of a visit to the country. Growth is forecast to slow to 0.4 percent in 2023, held back by tighter monetary and fiscal policies needed to curb inflation, and the lingering impact of the terms-of-trade shock from Russia’s war in Ukraine and a spike in energy prices. This represents a 0.7-percentage-point upgrade to April’s projection that the economy would shrink by 0.3 percent. Growth is expected to rise gradually to 1 percent in 2024, as slowing inflation softens the hit to real incomes, and to average around 2 percent in 2025 and 2026. “Monetary policy will need to remain tight in order to keep inflation expectations well-anchored and bring inflation to target,” Kristalina Georgieva, the IMF’s managing director, told a press conference in London at the end of the annual Article IV consultation. Watch the press conference

JAPAN Central Bank On Cusp Of Hitting Inflation Target (Credit: Gumpanat/iStock by Getty Images) Japan’s headline inflation reached a four-decade high in February. While lower energy prices have reduced inflation in recent months, underlying momentum in core prices, which exclude fresh food and energy, has also strengthened further, hitting a four-decade high of 4.1 percent in April. Rapid price gains are rarely desirable, but Japan is an exception after bouts of deflation since the late 1980s and early 1990s. But, as the IMF’s Purva Khera and Salih Fendoglu write in a Country Focus article, there are reasons for hope that the world’s third-largest economy is at a turning point and that the Bank of Japan may finally be able to sustain inflation around its 2 percent target. The key challenge facing the central bank is how to durably achieve its inflation target without significantly overshooting while safeguarding financial stability. Policymakers must carefully assess the advantages and disadvantages of different approaches as well as potential domestic financial stability implications, as the IMF outlines in the latest staff report. Writing in the March issue of Finance & Development magazine, Masaaki Shirakawa, Bank of Japan governor from 2008 to 2013, says it’s time to rethink the foundation and framework of monetary policy. Read here.

FINANCE & DEVELOPMENT The Return of Industrial Policy (Credit: Getty Images/Cfoto/Future Publishing) In the 1990s and 2000s, developing and transition economies opened up their markets and embraced globalization, but now policymakers debate the future of globalization, writes Dartmouth economics professor Douglas Irwin for the upcoming June edition of Finance & Development Magazine. “Trade interventions are on the rise, in the form of industrial policies and subsidies, import restrictions based on national security and environmental concerns, and export controls to punish geopolitical rivals and ensure domestic supply.” What, Irwin asks, should developing economies do to navigate this new environment? Should they adopt similar policies, turning inward to protect key sectors with subsidies and trade controls? “Developing economies would be ill-advised to turn their backs on the global economy and give up the idea of supporting exports and acquiring technology from beyond their borders. They still have much to gain from the rest of the world and a lot to lose by returning to the closed-door policies of the past.” Read the article

Many countries have used industrial policy to create global giants like Huawei, General Electric, Volkswagen, and Airbus. The practice of choosing national champions fell out of favor in the 1980s, but in this podcast Yale’s Ruchir Agarwal says rising geopolitical tensions have sparked a renewed interest in industrial policy—which can be a guise for protectionism.

FINANCE & DEVELOPMENT Coming Soon: June Issue (Credit: Nataliia Shulga / IMF) Next week, Finance & Development Magazine will publish its June 2023 issue, entitled Trade, Disrupted. With the liberal global trading system facing an existential challenge as many countries become increasingly concerned that closer economic integration risks clashing with national security, F&D brings together eminent voices from international organizations, governments, and academia share their views on the global trading regime’s benefits, pitfalls, and opportunities for improvement. Authors include Benjamin Kett, Caroline Freund, Chad Bown, Christopher Bataille, David Bloom, Douglas Irwin, Jiaqian Chen, Kristalina Georgieva, Leo Zucker, Luigi Zingales, Marijn Bolhuis, Michael Froman, Michele Ruta, Nadia Rocha, Ngaire Woods, Ngozi Okonjo-Iweala, Noah Kaufman, Pinelopi Goldberg, Raghuram Rajan, Ralph Ossa, Roberta Piermartini, Sagatom Saha, Tristan Reed, and many others. Stay tuned!

NATURAL GAS Market Integration Can Increase Energy Security (Credit: Cylonphoto/iStock) Closer ties allowed Europe to find new natural gas sources after Russia’s supply cutoff, and growing global export capacity can reduce market fragmentation, the IMF's Rachel Brasier, Andrea Pescatori and Martin Stuermer write in a blog. Natural gas prices can vary dramatically from one place to another because of the complex network of infrastructure needed to transport it. For instance, while pipeline flows to Europe from Russia dropped by 80 percent since mid-2021, sending the continent’s gas prices up 14-fold to a record level in August 2022 and prices for globally traded liquefied natural gas saw a similar jump, LNG prices in the United States merely tripled, remaining several times below Europe and Asia, the authors state. Expanded LNG export capacity for the United States and other producers may prove crucial to creating truly global gas markets that are balanced across regions. As advanced economies increase reliance on weather-dependent renewable energy from wind and solar, they will likely see critical periods of increased demand for supplemental natural gas to meet power generation needs, the authors write. “Integrating global gas markets and building needed infrastructure allows prices to stimulate demand and supply reactions in larger, more integrated markets. This helps to buffer global energy markets against supply shocks.”

Asia’s increased borrowing in recent decades has augmented the region’s exposure to rising interest rates and heightened market volatility. Even with resilient economic growth, interest payments may exceed earnings as borrowing costs rise, reducing firms’ ability to service their debts. As the Chart of the Week shows, corporate debt is concentrated in firms with low interest coverage ratios. When this ratio, a measure of how much corporate earnings can cover debt interest payments, is below or close to 1, a firm may become unable to service its debts. Read the blog

Weekly Roundup FRAGMENTATION Gita Gopinath on Fragmentation's Realities Talk about fragmentation is not just rhetoric, and the early signs of fragmentation are already taking root, Gita Gopinath, the IMF’s first deputy managing director, said on Thursday. “These changes have ushered in the beginning of a new paradigm in the global economic order—one that shifts away from decades of global economic integration and in which inward- and alliance-oriented policies are gaining traction,” she told a conference, underscoring three areas in the world economy where change is evident already. Read the speech. EUROPE Cheaper Energy Alone Won't Cure Inflation Declining energy prices will not be enough to bring Europe’s inflation back to central bank targets, with headline inflation expected to remain high at 5.6 percent in advanced economies and 11.7 percent in emerging economies this year, Alfred Kammer, director of the IMF’s European Department, said on Friday. “To address today’s high inflation, we need tighter monetary policy for longer, until inflation is on a firm path toward target,” Kammer said in a speech during a visit to Montenegro. SRI LANKA Mission Chiefs Explain IMF Program The IMF’s Sri Lanka mission chiefs Peter Breuer and Masahiro Nozaki spoke to Newsfirst’s Faraz Shauketaly about the country’s IMF-supported program. How will the program will help the economy? What reforms are expected? What is the IMF doing to protect the poor and vulnerable? Watch the interview. STAFF PAPER Monetary Policy and Corporate Zombies Extended periods of ultra-easy monetary policy in advanced economies have rekindled debate about “zombification” of stricken companies. A recent IMF staff paper finds that recessions are a critical factor in the rapid increase in the number of zombie firms. The authors say that expansionary monetary policy can help reduce zombification when interest rates fall to the lowest level possible (the so-called zero lower bound), but monetary policy that is too accommodative for extended periods is associated with a higher probability of zombification. STAFF PAPER Spillovers from US Economic News Economic news from the United States, and not just monetary policy, affects financial conditions in emerging markets, a recent IMF staff paper shows. News about US employment has the strongest effects, followed by news about economic activity. News about inflation has only limited effects. A key channel of international transmission of US economic news appears to be the risk perceptions or risk aversion of international investors. Some of the transmission of economic news occurs independently of the US monetary policy reaction.

MARK YOUR CALENDAR

MAY 30, 6:45 PM ET - MAY 31, 5 PM ET Rethinking Fiscal Policy The Peterson Institute for International Economics hosts a joint conference with the IMF featuring keynote speeches from Gita Gopinath, first deputy managing director of the IMF, Heather Boushey, member of the White House Council of Economic Advisors, and Lawrence H. Summers, Harvard professor and former US treasury secretary. Watch here

Thank you again very much for your interest in the Weekend Read! Be sure to let us know what issues and trends we should have on our radar.

(Photo: IMF Photo) Like so many countries across the Middle East and North Africa, Morocco faced successive shocks over the past three years including a devastating drought. But the country managed well thanks to an aggressive reform agenda. In this podcast, Morocco’s Finance Minister Nadia Fettah, and IMF Regional Director Jihad Azour, discuss how Morocco is keeping reforms on track despite the challenging circumstances, and what lessons other countries in the region might learn from Morocco’s experience. Their conversation was part of the Governor Talks series hosted by the IMF during the IMF-World Bank Spring Meetings, and a preamble to the Annual Meetings to be held in Marrakesh this fall.   Listen to the podcast on: IMF.org | Apple Podcasts | Spotify | Libsyn |  Soundcloud | Google Podcasts   Watch the Webcast     Thanks for listening to the podcast. We're always looking to improve your experience so let us know if you have any suggestions! Send your comments to me at bedwards2@imf.org.   Bruce Edwards Producer, IMF Podcasts