Dear MARIA, welcome to the October 9 briefing from the annual meetings
In the first of our daily newsletters from the Marrakech meetings, we spotlight Morocco’s recovery from last month’s earthquake and plans for lasting economic growth, the importance of policymakers who promote innovation in Africa, the economic obstacles faced by young people in the Arab world, how the IMF is adapting its lending tools, and much more.
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(Credit: IMF Photo/Kim Haughton)
Morocco Can Build Back Better
Morocco’s strong institutions and economic policies will speed recovery from the September 8 earthquake and reconstruction programs could inject new life into the economy, Kristalina Georgieva said after visiting schools in regions affected by the disaster.
More than 2,900 people were killed, mostly in remote villages high up in the Atlas mountains, by the 6.8-magnitude quake.
“The best memorial Morocco can build for those who lost their lives is to build back better,” the IMF managing director said at an event to launch a new book on the country's economic future.
Morocco’s central bank governor, Abdellatif Jouahri, said government plans to spend 120 billion dirhams ($11.7 billion) over the next five years, as well as ordinary citizens’ contributions to solidarity fund, would limit the negative economic impact.
Nadia Fettah, Morocco’s finance minister, said the authorities had come up with a comprehensive plan for reconstruction to narrow some of the socioeconomic disparities that characterized disaster-hit regions.
“When we are facing crisis, we also reinvent ourselves for a better future, especially for the youngest,” she said.
WATCH HERE
Kristalina Georgieva discusses the costs of geoeconomic fragmentation. Nigeria-based media mogul and philanthropist Mo Abudu also joins fresh off the stage from Africa Inspired.
(Credit: IMF Photo/Sarah Silbiger)
Africa Would Benefit From More Industrial Policy
Africa is pivotal to the future of the world economy but the continent needs industrial policies and policymakers who enable innovation, Ory Okolloh, a pan-African focused venture capitalist, told an Africa Inspired discussion.
“We cannot leapfrog no matter the technology. We need to make things in Africa—it’s so critical,” Okolloh told the event.
The narrative on Africa must also change, said Mo Abudu, chief executive of EbonyLife Media. “As a continent we’ve just been so quiet—the world doesn’t know who we are, except for their vision of who they think we are.”
Leaders must tap the voices of Africa’s youth, she added, and invest in capacity building and training.
That’s a theme that resonated with Lamia Taz, chief executive of Sothema, a pharmaceutical company in Africa and the Middle East. The government’s role, she noted, should be to educate and train.
“A new generation of children is growing up with artificial intelligence. Medicine is changing, biotech is coming. We have to be ready.”
Congratulations to Claudia Goldin for her Nobel Prize in Economics! Her work has helped us understand the changing economic role of women and the challenges they continue to face in the work world. Listen to our IMF podcast and read our People in Economics profile.
(Credit: IMF Photo/Sarah Silbiger)
Arab World's Young People Define Brighter Future
Kristalina Georgieva called on young people to define a brighter future for the world in a dialogue with Arab youth on the obstacles they face and how leaders can remove them.
Ghalia Damak, an entrepreneur from Tunisia, told the Dialogue with Tomorrow’s Leaders that lack of access to finance and complicated regulations are among the issues that have led to brain drain, a key obstacle her country is facing.
Taha Namri, an IMF economist from Morocco, discussed the importance of addressing inequality and removing barriers to women’s participation in the labor market. According to IMF research, reducing the gender gap in emerging markets by 50 percent would create $1 trillion of output.
The panelists also discussed the importance of data-driven policymaking. Mauritania’s Teslem Zein added that transparency and social dialogue are crucial for ensuring the success of policies. She concluded by stating that leaders cannot just have strategies on paper; their strategies for youth must be “concrete, inclusive, and backed by data.”
WATCH HERE
NUMBER OF THE DAY
According to IMF research, reducing the gender gap in emerging markets by 50 percent would create $1 trillion of output.
$1trillion
(Credit: IMF Photo/James Mertz)
Kristalina Georgieva underlined the importance of working together to deal with debt at a townhall with civil-society organizations. Some emerging economies and more than half of low-income countries remain at high risk of debt distress, while rising debt-servicing costs mean many governments face tough decisions, the managing director told the meeting of around 250 organizations from all parts of the world before answering questions.
CHART OF THE DAY
IMF Lending Continues to Adapt
As the world confronts the weakest medium-term growth outlook in three decades amid high debt levels, fragmented trade and the prospect of higher-for-longer interest rates, the IMF is redoubling its efforts to promote stability and growth. As the chart of the days shows, the IMF has lending commitments with 94 countries for about $287 billion, or SDR 218 billion. See our factsheet on IMF lending instruments.
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Dear MARIA,
We just published a new blog—please find the full text below.
Resilient Global Economy Still Limping Along, With Growing Divergences
By Pierre-Olivier Gourinchas
For a breakdown of country-by-country growth projections,
visit the blog here.
The global economy continues to recover from the pandemic, Russia’s invasion of Ukraine and the cost-of-living crisis. In retrospect, the resilience has been remarkable. Despite war-disrupted energy and food markets and unprecedented monetary tightening to combat decades-high inflation, economic activity has slowed but not stalled. Even so, growth remains slow and uneven, with widening divergences.
The global economy is limping along, not sprinting.
According to our latest projections, world economic growth will slow from 3.5 percent in 2022 to 3 percent this year and 2.9 percent next year, a 0.1 percentage point downgrade for 2024 from July. This remains well below the historical average.
Headline inflation continues to decelerate, from 9.2 percent in 2022 on a year-over-year basis, to 5.9 percent this year and 4.8 percent in 2024. Core inflation, which excludes food and energy prices, is also projected to decline, albeit more gradually, to 4.5 percent next year. Most countries aren’t likely to return inflation to target until 2025.
As a result, projections are increasingly consistent with a soft landing scenario, bringing inflation down without a major downturn in activity, especially in the United States, where our forecast increase in unemployment is now modest, from 3.6 percent to 3.9 percent by 2025.
But important divergences are appearing, leaving activity in some regions much below pre-pandemic projections. The slowdown is more pronounced in advanced economies than in their emerging market and developing counterparts. Among advanced economies, the US growth outlook has been revised up, with resilient consumption and investment, while euro area activity was revised downward. Many emerging market economies also proved unexpectedly resilient, with the notable exception of China, which faces growing headwinds from its real estate crisis and weakening confidence.
Three forces are at play:The recovery in services is almost complete and the strong demand that supported services-oriented economies is now softening.
Tighter credit conditions are weighing on housing markets, investment, and activity, more so in countries with a higher share of adjustable-rate mortgages or where households are less willing, or able, to dip into their savings. Firm bankruptcies are increasing in some economies, although from historically low levels. Countries are now at different points in their hiking cycle: advanced economies (except Japan) are near the peak, while some emerging market economies that started hiking earlier, such as Brazil and Chile, have already started easing.Inflation and economic activity are shaped by last year’s commodity price shock. Economies heavily dependent on Russian energy imports saw a steeper increase in energy prices and a sharper slowdown. The passthrough from higher energy prices played a large role in driving core inflation higher in the euro area—unlike the United States, where core inflation pressures instead reflect a tight labor market.
Despite signs of softening, labor markets in advanced economies remain buoyant with historically low unemployment rates helping to support activity. Real wages are catching up, but there is scant evidence of a wage-price spiral. Further, many countries experienced a sharp—and welcome—compression in the earnings distribution, with the higher amenity value of flexible and remote work schedules reducing wage pressures for high earners.
Gauging risks
While some of the extreme risks—such as severe banking instability—have moderated since April, the balance remains tilted to the downside.
China’s real-estate crisis could intensify, posing a complex policy challenge. Restoring confidence requires promptly restructuring struggling property developers, preserving financial stability, and addressing the strains in local public finance.
If China’s real estate prices decline too rapidly, the balance sheets of banks and households will worsen, with the potential for serious financial amplification. Artificially supporting real estate prices may temporarily protect balance sheets, but this will crowd out other investment opportunities, reduce new construction, and hurt local government revenues through reduced land sales. Either way, China’s economy must pivot away from growth that relies on credit for the real estate sector.
Meanwhile, commodity prices could become more volatile amid climate and geopolitical shocks, a serious risk to disinflation. Between June and late September, oil prices had increased by about 25 percent amid extended supply cuts by OPEC Plus, the Organization of the Petroleum Exporting Countries and selected nonmembers, before falling back by about 11 percent. Food prices remain elevated and could be further disrupted by an escalation of the war in Ukraine, inflicting greater hardship on many low-income countries. Geoeconomic fragmentation has also led to a sharp increase in the dispersion in commodity prices across regions, including critical minerals. This could pose serious macroeconomic risks, including to the climate transition, as we show in Chapter 3 of our latest World Economic Outlook.
And, while both underlying and headline inflation have decreased, they remain uncomfortably high. Near-term inflation expectations have risen markedly above target, although they now appear to be turning a corner. As Chapter 2 of the WEO details, bringing these near-term inflation expectations back down is critical to winning the battle against inflation.
In addition, fiscal buffers have eroded in many countries, with elevated debt levels, rising funding costs, slowing growth, and an increasing mismatch between the growing demands on the state and available fiscal resources. This leaves many countries more vulnerable to crises and demands a renewed focus on managing fiscal risks.
Finally, despite tightening monetary policy, financial conditions have eased in many countries, as detailed in the latest Global Financial Stability Report. The danger is of a sharp repricing of risk, especially for emerging markets, that would further strengthen the US dollar, trigger capital outflows, and increase borrowing costs and debt distress.
Policy priorities
Under our baseline scenario, inflation continues to recede as central banks maintain a tight stance and avoid easing prematurely. Once the disinflation process is firmly established, with decreasing near-term inflation expectations and inflation targets coming into sight, gradually cutting the policy rate will be appropriate, while maintaining a commitment to price stability.
Fiscal policy needs to rebuild buffers, including by removing energy subsidies, while still protecting the vulnerable. This will also aid disinflation. Fiscal and monetary policies pulled in the same direction last year as many pandemic emergency fiscal measures were unwound, but they are less aligned this year. The substantial widening of the fiscal deficit in the United States is most worrying, as fiscal policy should not be pro-cyclical, especially at this stage of the inflation cycle.
We should also return our focus to the dimming medium-term outlook. Global growth prospects are weak, especially for emerging market and developing economies. The implications are profound: a much slower convergence toward the living standards of advanced economies, reduced fiscal space, increased debt vulnerabilities and exposure to shocks, and diminished opportunities to overcome the scarring from the pandemic and the war.
With lower growth, higher interest rates and reduced fiscal space, structural reforms become key. Higher long-term growth can be achieved with a careful sequencing of reforms, starting with those focused on governance, business regulation and the external sector. These first-generation reforms help unlock growth and make subsequent reforms—whether to credit markets, or for the green transition—much more effective.
Multilateral cooperation can help ensure countries achieve better growth outcomes. Countries should avoid implementing policies that contravene World Trade Organization rules and distort international commerce. And countries should safeguard the flow of critical minerals, needed for the climate transition, and of agricultural commodities. Such “green corridors” would help reduce volatility and accelerate the green transition.
Finally, all countries should prevent geoeconomic fragmentation that impedes progress toward a shared prosperity. Instead, they should work to restore trust in rules-based multilateral frameworks that enhance transparency and policy certainty. A robust global financial safety net with a well-resourced IMF at its center is essential.
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!
Dear MARIA,
We just published a new blog—please find the full text below.
Higher-for-Longer Interest Rate Environment is Squeezing More Borrowers
By Tobias Adrian
The world’s central banks have unleashed the steepest series of interest-rate increases in decades during their two-year drive to tame inflation—and they may not be done yet. Policymakers have raised rates by about 400 basis points on average in advanced economies since late 2021, and around 650 basis points in emerging market economies.
Most economies are absorbing this aggressive policy tightening, showing resilience over the past year, but core inflation remains elevated in several of them, especially the United States and parts of Europe. Major central banks therefore may need to keep interest rates higher for longer.
In this environment, risks to the world economy remain skewed to the downside, as we detail in in our Global Financial Stability Report. Though this latest assessment of vulnerabilities is similar to what we noted in April, the acute stress we saw in some banking systems has since subsided. However, we now see indications of trouble elsewhere.
One such warning sign is the diminished ability of individual and business borrowers to service their debt, also known as credit risk. Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation. The risk, however, is that borrowers might already be in precarious positions financially, and the higher interest rates could amplify these fragilities, leading to a surge of defaults.
Eroding buffers
In the corporate world, many businesses suffered closures during the pandemic, and others emerged with healthy cash buffers thanks in part to fiscal support in many countries. Firms were also able to protect their profit margins even though inflation had picked up. In a higher-for-longer world, however, many firms are drawing down cash buffers as earnings moderate and as debt servicing costs rise.
Indeed, the GFSR shows increasing shares of small and mid-sized firms in both advanced and emerging market economies with barely enough cash to pay their interest expenses. And defaults are on the rise in the leveraged loan market, where financially weaker firms borrow. These troubles are likely going to worsen in the coming year as more than $5.5 trillion of corporate debt comes due.
Households too have been drawing down their buffers. Excess savings in advanced economies have steadily declined from peak levels early last year that were equal to 4 percent to 8 percent of gross domestic product. There are also signs of rising delinquencies in credit cards and auto loans.
Headwinds also confront real estate. Home mortgages, typically the largest category of household borrowing, now carry much higher interest rates than just a year ago, eroding savings and weighing on housing markets. Countries with predominantly floating rate mortgages have generally experienced larger home price declines as higher interest rates translate more quickly into mortgage payment difficulties. Commercial real estate faces similar strains as higher interest rates have resulted in funding sources drying up, transactions slowing, and defaults rising.
Higher interest rates also are challenging governments. Frontier and low-income countries are having a harder time borrowing in hard currencies like the euro, yen, US dollar and UK pound as foreign investors demand greater returns. This year, hard currency bond issuances have occurred at much higher coupon—or interest—rates. But sovereign debt concerns do not only apply to low-income countries, as the recent surge in longer-term interest rates in advanced economies has demonstrated.
By contrast, major emerging economies largely do not face this predicament given better economic fundamentals and financial health, although the flow of foreign portfolio investment into these countries has also slowed. Material amounts of foreign investment have left China in recent months as mounting troubles in its property sector have dented investor confidence.
Spillover effects
Most investors appear to have shrugged off mounting evidence that borrowers are having repayment troubles. Along with generally healthy stock and bond markets, financial conditions have eased as investors appear to expect a global soft landing, in which higher central bank interest rates contain inflation without causing a recession.
This optimism creates two problems: relatively easy financial conditions could continue to fuel inflation, and rates can tighten sharply if adverse shocks occur—such as an escalation of the war in Ukraine or an intensification of stress in the Chinese property market.
A sharp tightening of financial conditions would strain weaker banks already facing higher credit risks. Surveys from several countries already point to a slowdown in bank lending, with rising borrower risk cited as a key reason. Many banks will lose significant amounts of equity capital in a scenario where high inflation and high interest rates prevail and the global economy tips into recession, as we explore in a forthcoming GFSR chapter. Investors and depositors will scrutinize the prospects of banks if their stock-market capitalization falls below the value of balance sheet, causing funding problems for the weak bank. Outside of banking system, fragilities are also present for nonbank financial intermediaries, such as hedge funds and pension funds, that lend in private markets.
Reassuringly, policymakers can prevent bad outcomes. Central banks must remain determined in bringing inflation back to target—sustained economic growth and financial stability is not possible without price stability. If financial stability is threatened, policymakers should promptly use liquidity support facilities and other tools to mitigate acute stress and restore market confidence. Finally, given the importance of healthy banks to the global economy, there is a need to further enhance financial sector regulation and supervision.
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!
Dear MARIA, welcome to the October 11 briefing from the annual meetings
The third of our daily newsletters from the Marrakech meetings spotlights the challenges of containing global warming while keeping public debt in check, the disproportionate impact of shocks on the world’s poorest nations, the IMF’s continued support for Ukraine, and much more.
FULL SCHEDULE
(Credit: IMF Photo/Sarah Silbiger)
World Must Contain Global Warming While Keeping Debt in Check
Countries will need a new mix of policies with carbon pricing at the center if they hope to deliver on global climate goals while avoiding soaring public debt, according to the IMF’s Fiscal Monitor report released on Wednesday.
“Current national objectives and policies will fail to deliver net zero emissions, with potentially catastrophic consequences,” Vitor Gaspar, director of the IMF’s Fiscal Affairs Department, told a press briefing.
Scaling up the current mix of climate policies, which relies mainly on subsidies and other spending measures, could increase public debt by as much as 50 percentage points of gross domestic product by 2050, he said.
Worldwide, debt levels are generally elevated, and borrowing costs are climbing, making it more difficult for countries to devote adequate budget space to climate action.
Gaspar urged major players such as China, India, the United States, the African Union, and the European Union to take a cooperative approach when they meet next month at COP 28.
WATCH HERE
NUMBER OF THE DAY
Slower economic growth, higher interest rates and pressure on primary deficits could drive global public debt to more than 100 percent of gross domestic product by the end of the decade
100%OF GROSS DOMESTIC PRODUCT
(Credit: IMF Photo/Joshua Roberts)
Poorest Countries Suffer Most in Shock-Prone World
The poorest countries have been disproportionately affected by recent global shocks, IMF Deputy Managing Director Kenji Okamura told a seminar on Wednesday.
In the past three years, low-income countries have seen a cumulative loss of more than 6 percent in real gross domestic product, about five times more than advanced economies. Poor countries also face a historic funding squeeze due to tighter global financial conditions, elevated debt, and high sovereign spreads, Okamura said.
“For the African continent alone, the IMF estimates the financing need for low-income countries to be $225 billion over the medium-term.”
African Development Bank chief economist Kevin Chika Urama identified the current junction as an opportunity for shared prosperity for Africa and the world. “Over 30 percent of green minerals are found on the continent, so the future of the green transition also depends on how Africa utilizes that,” he said.
Rania Al-Mashat, Egypt’s minister of international cooperation, said closing the Sustainable Development Goals gaps remains the best path forward. “While strategies are designed at the country level, the impact is at the global level.”
Supporting farmers remains crucial in improving food security. According to Alvaro Lario, president of the International Fund of Agricultural Development, over 70 percent of food is produced by small-scale farmers, many of whom are going hungry.
Mohamed Hettiti, chief operating officer for OCP Africa, said that accelerating adoption of specialized fertilizer would allow farmers to reduce costs and increase income.
WATCH HERE
(Credit: IMF Photo)
IMF Calls For Continued Ukraine Support
President Volodymyr Zelensky thanked the international community for supporting Ukraine and stressed the need for continued support on Wednesday at a ministerial roundtable, co-chaired by the Ukraine government, World Bank and IMF.
Priorities for the international partners include maintaining sanctions, supporting confiscation of aggressors’ assets, guaranteeing long-term financial support, stimulating private investment and boosting project financing, Ukraine’s president said.
Kristalina Georgieva emphasized the Fund’s support for Ukraine—including through its Extended Fund Facility program—and applauded the authorities’ skillful economic management.
While Ukraine’s economy is recovering faster than expected with encouraging signs on growth and inflation, the IMF managing director said in her remarks that next year’s financing needs are higher than previously estimated.
“Ukraine’s recovery can only be sustained with unwavering support.”
Climate is on the agenda today. IMF Deputy Managing Director Bo Li discusses how the Fund is helping member countries combat the climate crisis. Minister Marlene Malahoo Forte of Jamaica provides her on-the-ground perspective on how the IMF can support members’ climate policies.
(Credit: IMF Photo/Lewis Joly)
Climate Innovation Challenge
One of the five winning teams of the Climate Innovation Challenge, an IMF-organized competition that started in 2021, launched their “Machine Learning Toolbox for Climate Policy Analysis” at a session on Wednesday. IMF researchers Yunhui Zhao and Li Tang described how their toolbox can identify large changes in greenhouse-gas emissions and help policymakers address climate change. “The urgency of the climate crisis calls for bold policies,” IMF Deputy Managing Director Bo Li told the session.
CHART OF THE DAY
Increasing shares of small and mid-sized firms in both advanced and emerging market economies with barely enough cash to pay their interest expenses. As the Chart of the Day shows, these troubles are likely going to worsen in the coming year as more than $5.5 trillion of corporate debt comes due.
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