For emerging markets, the G-20 summit is an opportunity to persuade the US to calibrate its withdrawal of loose monetary policy.
There will be much more on the US president's mind than Syria and Edward Snowden when he takes part in the G-20 summit at St Petersburg that begins today. Foremost among these will be the unhappiness of the emerging market members of the grouping over the Federal Reserve's withdrawal from an easy monetary policy stance.
This year's G-20 meeting will probably be the first where the emerging market members are expected to collectively pitch for coordinated monetary policy actions within the group. Synchronised policymaking has been a major objective of the G-20 since the global financial crisis. But never before has it met when almost all of its emerging market members are struggling to cope with low economic growth and severe financial turbulence, holding the Fed responsible for their distress.
Over the last few months, major emerging market economies have been fighting to stop macroeconomic imbalances from spinning out of control. Most of these economies — India, Brazil, Indonesia, Mexico, Turkey, and South Africa — are facing runs on their national currencies, which have depreciated fast against the US dollar. The Indian rupee has been one of the worst hit. The problem has arisen because of a sudden drop in the availability of American dollars in these economies — largely due to the Fed's decision to reverse quantitative easing (QE).
Since the global financial crisis in September 2008, the Fed has been injecting money in the US economy to boost demand and economic growth. It has been purchasing financial assets (debt and equity) in return for cash. The cash has been parked by institutional investors in emerging market securities promising high long-term yields. India and other emerging markets thrived on the foreign inflows. Most of these economies were running current account deficits as their exports were suffering from low global demand. The dollar inflows helped them cover the current account deficit, stabilise the balance of payments and add to foreign exchange reserves.
Circumstances changed as signs of recovery in the US economy encouraged the Fed to announce its intention to back off from the QE. With the Fed poised to stop buying assets, the prospects of future returns on US securities have improved. The same investors who pumped in dollars in emerging markets have now begun pulling out money to re-invest in US securities. This has led to sharp outflows of dollars from emerging markets, making the dollar dearer. With exports remaining stagnant, the current account deficits have begun widening and foreign exchange reserves, shrinking.
For India and other emerging markets nursing economic woes, the St Petersburg meeting is an opportunity to persuade the US to calibrate its monetary policy actions in a manner that does not produce macroeconomic disturbances elsewhere. Most emerging markets, including China and Russia, would urge the G-20 to unveil an action plan ensuring such calibration. The spadework has already been done in the meeting of the G-20 finance ministers and central bank governors in July. The communiqué released urged the development of a comprehensive St Petersburg action plan. It specifically noted the importance of "calibrating" and "communicating" changes in monetary policies, given the financial and economic instabilities created by volatile financial flows and disruptions in exchange-rate movements.
While emerging markets will be hoping to build on the impetus of the July meeting for securing an action plan, their success might come only with major caveats. One of these is likely to be an emphasis on fiscal consolidation. The US and other OECD members from the G-20 will pick on the shoddy fiscal management in India and other emerging markets. They are also likely to point out that the current macroeconomic problems being faced by these countries are not a result of the change in US monetary policy but an outcome of their inabilities to rein in inessential expenditure, leading to high deficits. India, for one, would find it rather difficult to counter the charge given the fiscal profligacy it has indulged in during the last few years.
Further, any comprehensive action plan endorsed by the G-20 for minimising financial market volatility might also insist on emerging markets adopting more open and forward-looking trade agendas. The OECD countries are likely to insist on revival of global trade as the key to resurrection of global growth. To that extent, the pressure on emerging market economies to participate in ongoing global and regional trade talks with more "open" outlooks is likely to increase.
The effectiveness of any proposed plan will depend upon the extent to which the G-20's agenda for strong and sustainable global growth stays unaffected by the conflicting political dynamics of the meeting. The American discomfort with Russia and China over major global security and economic issues is the biggest concern. India will need to carefully craft its responses. While it should work with other like-minded partners such as Brazil and Indonesia to secure macroeconomic objectives, it needs to assess the trade-offs involved, both in terms of agreeing to fiscal commitments and trade liberalisation, as well as strategic positioning on sensitive issues like Syria.
The writer, formerly with the Union ministry of finance, is senior research fellow at the ISAS, National University of Singapore.