IMF Weekend Read

 

In today's edition, we highlight: IMF Annual Meetings Curtain Raiser Managing Hedge Fund Risk Cost-of-Living Shocks Shifting Tax Competition Tokenization’s Promise and Reality GLOBAL OUTLOOK Raising the Curtain on the IMF Annual Meetings The global economy faces powerful crosscurrents. AI is creating new opportunities for growth, while persistently high energy prices and record public debt pile pressure on policymakers, IMF Managing Director Kristalina Georgieva said in Singapore on October 7, ahead of the Annual Meetings in Bangkok next week.   Higher energy prices are pushing up inflation and bond yields, which are “still climbing” in several major economies. With global public debt on track to soon exceed 100 percent of GDP, “elevated yields are inflating the interest bill,” Georgieva said. The AI boom, meanwhile, is driving growth in economies at the heart of its supply chain but “largely bypasses most others,” raising the risk of wider inequality.   For high-debt advanced economies, the “need of the hour” is credible medium-term fiscal consolidation. Emerging markets, too, should strive to increase the room for maneuver in their budgets. Policymakers face “very tough political choices,” and Georgieva urged them to explain why consolidation is needed, limit its cost to growth, and protect the most vulnerable, alongside reforms to unlock AI’s full potential.   “We cannot keep delaying necessary policy action—you have the tools, now have the wisdom to use them.” Read the speech IMF-WORLD BANK ANNUAL MEETINGS Get the latest Annual Meetings insights delivered daily Subscribe to the Daily Wrap FINANCIAL STABILITY Managing Hedge Fund Risk Hedge funds help markets function, but the same features that make them useful in normal times can amplify shocks when volatility rises. Stocks most widely held by hedge funds are 10 percentage points more volatile in times of stress, and suffer 4 percentage points deeper losses, than the least crowded stocks, according to a new blog based on a chapter in the IMF’s latest Global Financial Stability Report.   The effects are larger when hedge funds also face simultaneous investor redemptions and high leverage. Their assets under management have tripled to $13 trillion since 2013, and they held about 9 percent of US Treasury bonds last year. “Whether they support markets or worsen stress depends on the vulnerabilities that can manifest in their balance sheets—notably, leverage, crowded positions, and redemption pressures,” write Andrea Deghi, Taneli Mäkinen, Mahvash S. Qureshi, and Felix Suntheim.   Better reporting and information sharing on leverage, derivatives exposures, and prime broker relationships can help authorities spot vulnerabilities early, the authors argue. Policy measures should be calibrated to the source of risk, whether synchronized deleveraging across many funds or concentrations in specific firms. Read the blog COST OF LIVING   Protect People Better When food and energy prices surge, governments often try to cap price increases. This can offer quick relief during a cost-of-living crisis. But the effectiveness of such measures varies widely, as does the burden they impose on public finances, according to a new blog drawing on a chapter in the IMF’s latest World Economic Outlook.   “Targeted and temporary transfers are the most effective and cost-efficient way to protect poorer households when prices for basics spike,” write Braulio Britos, Chiara Maggi, Galip Kemal Ozhan, and Sihwan Yang. Direct support reaches those most affected while allowing prices to signal scarcity and encourage conservation.   The difference in cost can be striking. Providing equivalent protection through consumer subsidies can require three to six times more fiscal resources than targeted transfers; producer subsidies can cost 14 to 22 times as much. Building social-protection systems before a crisis can help governments respond quickly while protecting scarce fiscal space.   Related reading: What Governments Should Do When Food Prices Surge How Countries Are Adapting as the Global Energy Shock Persists Read the blog CORPORATE PROFITS Shifting Tax Competition Multinationals appear more likely to report profits where they invest, rather than where taxes are lowest, as anti-avoidance measures become more widespread, according to a new blog based on a chapter in the IMF’s latest World Economic Outlook.   This suggests that tax competition between countries may become less about attracting profits and more about luring the economic activity that generates them, write Paula Beltran Saavedra, Daisuke Fujii, Gene Kindberg-Hanlon, and Colombe Ladreit.   Reported profits have become less sensitive to differences in tax rates, while real investment has become more sensitive. This pattern is evident among firms that rely less on intangible assets such as patents and software, or that are headquartered in countries that have strengthened their anti-avoidance rules. Read the blog TOKENIZATION Promise and Reality What’s the benefit of recording bonds or equities as digital tokens on a shared, programmable ledger? The practice, known as tokenization, promises faster transactions, lower costs, broader access, and seamlessly operating markets. The reality, at least for now, is more complicated.   Although growing rapidly, tokenized markets remain small and fragmented, according to a new IMF blog based on a chapter of the latest Global Financial Stability Report. Most activity is in tokenized repurchase agreements, or repos—short-term loans backed by government bonds. They average $300 billion to $350 billion in daily trading volume, against $13 trillion in the traditional US repo market. Other tokenized assets, such as credit, money market funds, and equities, are valued at about $65 billion, compared with some $300 trillion in global equity and fixed income assets.   Investors are nonetheless drawn to tokenization’s novel features, such as round-the-clock trading and fractional ownership of equities. “Tokenization may yet transform finance, but its future will be determined less by technological possibilities than by policies that ensure market depth, trust, and sound safeguards,” write Gonzalo Fernandez Dionis, Caio Ferreira, Mindaugas Leika, and Athanasios Vamvakidis. Read the blog FISCAL POLICY Taxing Better Good taxation is about much more than the headline rate. Countries that design taxes well and implement them effectively can strengthen growth while safeguarding government revenue, according to a chapter of the IMF’s new Fiscal Monitor.   “How governments raise revenue matters as much as how much they raise,” the chapter says. Reducing distortions caused by poorly designed taxes can support production, investment, innovation, and employment while preserving overall revenue.   The potential gains are sizable. Removing the tax-related increase in the cost of capital—for example through a cash flow tax that lets firms deduct investment costs immediately—could raise GDP by 2.1 to 2.7 percent in the long run. Any such reform would need to be part of a broader policy package to safeguard overall revenue. Modern tax administration and clear legal frameworks can also lower compliance costs and narrow productivity gaps between small and large firms. Read the chapter Thank you 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.  Nicholas Owen Senior Editor | IMF Weekend Read  nowen@imf.org Stay connected with the International Monetary Fund: