I spent a few days last week at the Spring Meetings of the International Monetary Fund and World Bank in Washington, a useful opportunity to take the pulse of many economists, policymakers and investors. The mood of many was cautiously pessimistic (though more optimistic than if it had been convened a few weeks earlier). Folks were worried about growth, and the WEO included modest growth downgrades for most regions for the next year, and continued downward medium-term growth prospects. They also worried about the persistent inflation, the costs of the rapid exit from monetary easing, and economic competition. Many I spoke to were concerned that the acute risks that reared to the head a few weeks ago were not fully vanquished and even if those risks have become chronic, that they will present meaningful growth risks.
Policymakers charged to reduce concerns about financial stability risks highlighted a commitment to liquidity, but central bankers, both in developed and emerging world, expressed concerns about inflation, suggesting the end of the hiking cycle is far from over. The risks that oil markets might tighten and associated risks to Russian oil price cap added to some of the inflationary worries. Still, the mood was negative on growth, but less concerned about systemic acute risks, the very crises that policymakers are probably best equipped to manage. I’ll write separately about the price cap and sanctions and some of the economic impacts of the Russian war.
The major topics or worries were debt (especially US and frontier markets), sluggish growth, persistent inflation, US-China competition and the state of the global financial system. Although economic forecasts edged lower (especially in Europe and some larger EM), neither the IMF nor most commentators were ready to call for a recession as the base case or to assign a time. Overall, the worries about acute financial risks such as the spillovers from the weak balance sheets of SVB, Signature Bank and others led to swift deposit flight morphed back into chronic issues of rising debt service for countries and some businesses. Central bank and deposit insurance support arguably have reduced such acute systemic risks, but the growth drag associated with past debt, rising debt service and increased scrutiny of borrower balance sheets will not only add economic but also political problems. Notably, there was less concern about financial stability risks among key EM policymakers or investors, suggesting the rather limited credit expansion and weak growth (Turkey as always is an exception).
As the debt ceiling moment of truth approaches, more investors continue to worry about a possible default, even a temporary one, which would be a national security own goal in many ways, both because it would require spending cuts if only temporarily but it would likely accelerate a move of foreigners away from US Treasurys. While US assets continue to be desired, investment into equities, Agency bonds and other assets has outstripped Treasurys. Even if the default is avoided, the combination of continued growth and continued inflation, perhaps amplified by an industrial policy mix that prompts redundancy. Overall, the baseline scenario on growth suggests that market expectations a) that the Fed is almost done and b) that rate cuts will come soon look optimistic. This suggests repricing not only in US markets but many emerging economies rates markets.
Less systemic financially, due to lower contagion risk, but important from a geopolitical and security view is the difficulty addressing debt distress in several frontier and some emerging economies. The meetings were the occasion for a new Debt roundtable that agreed to better information sharing between the IMF and World Bank. Overall there was a general agreement that Common Framework was still not moving quickly enough, that ‘compromise’ agreements with the Chinese were really just finally admitting to previous rules of the road (multi-lateral seniority etc) and that the richer countries/IMF still haven’t figured out how to operationalize SDR related lending. Some debt restructuring stories continue on, and more are likely, but they continue largely to be a case-by-case story. An issue we noted in the October 2022 meetings persists – there is not an agreement whether some poorer frontier markets should have market access.
On a country specific story, the most surprising narrative concerned Turkey, where an increasing number of analysts are now expecting an opposition victory, likely in the second round, unseating long-time president Erdogan and his AKP party and a quick shift to “market friendly” policies (rate hikes, less cronyism, less boom and bust-credit cycles). The polls still seem a toss-up that is hard to predict, with risks of disruption, consolidation challenges and jockeying. While market actors would likely be with the opposition, especially if they say the right things on the central bank and fiscal side, it might well be a little more disruptive along the way. While long-term trends would likely be positive, the “market-friendly” options would likely be costly especially the hike in rates. Either way, Turkey’s imbalances suggest tough choices ahead.
Overall this is a key election to watch not only for Turkey itself but for the dynamics in the region including Turkey’s role as a negotiator between Russia and Ukraine on issues like the grain deal (which comes up for yet another renewal right after the first round. Some key structural trends will drive the outlook – the need to rebuild infrastructure in earthquake affected areas, which will be a driver of investment for several years and the need to keep key regional actors onside (GCC, Russia), while avoiding extensive sanctions from the US and EU. Turkey is far from the only country hedging in this way or focusing in on its national economic and other strategic interests.
Another country that is already in a key transition period is Nigeria, where the winning candidate Tinubu has pledged to reduce oil subsidies, and address the exchange rate which has sharply diverged from the market rate. Many have heard these stories (and efforts to stop fuel smuggling) before, and wonder whether this government is ready to accept the political and economic costs. The policymakers do seem to be commited, but the coordinated major shift if it occurs would have costs and risks of overshooting. All of this also needs to happen at the same time as elections investigations are continuing. Nigeria stands out as a country that needs to address these costs, especially since it is far too reliant on refined fuel imports, but the implementation is always more painful in the short-term. It remains to be seen if they choose a half-way option.
Ziemba Insights 