1. There
is a major, Great Experimentation and significant transformation under way in
terms of the macroeconomic framework in advanced countries, which will have
major consequences akin to the rebuilding of the global financial system after
World War II.
2. Debt
overhangs, significant macroeconomic distortions, adverse incentives for
adjustments, and deficient governance structures in advanced economies risk
causing an increasing fragmentation of the global economy. This state of play
has created significant distortions in the global marketplace. Central banks'
balance sheets have increased exponentially through net domestic asset creation
in advanced economies, and net foreign asset creation in emerging markets has
led to unprecedented monetary expansions.
3. Overall
global economic growth still remains weak, despite the expansionary monetary
policies adopted by some central banks. Their limited success in stimulating
the economy may be attributed to the fact that the nature of monetary expansion
is not favourable to credit expansion, with the monetary base being created
mostly through collateralized flows on the basis of securities of deleveraging
governments. Policy uncertainty remains very high, and the long-term
repercussions of unprecedented, unconventional monetary stimulus, as well as
the impact of eventual exit strategies, debt-servicing, global markets, and
currency volatility, are yet to be completely known.
4. The changes in the global economy are profound,
with structural, long-term implications. We are moving towards a new phase,
witnessed by a shift in focus from the legacy of the crisis in the West towards
the emerging and developing world. There are opportunities for global recovery
and growth. Many American and European businesses are sitting out the recession
with increasing amounts of cash. There
is plenty of room for supply side driven growth if this liquidity were invested
in R&D of new technologies, activities in which advanced economies have a clear
comparative advantage. The expanding emerging economies that have enough
savings to finance high rates of investments are absorptive markets for the
technological and managerial services of the established multinationals and
successful technological start-ups of the advanced economies. Other emerging
economies with low rates of domestic savings, which create conditions to absorb
financial capital from abroad will also become markets for advanced economies'
technology and management. Reinvigorated global trade in capital goods and
technological and managerial services could help to implement available
technologies in emerging economies and spur global growth and progress. However,
taking advantage of these opportunities requires a greater degree of economic
strategy and policy coordination at the global level.
5. Sound
medium-and long-term fiscal management provides greater policy room for
shorter-term stimulus during economic downturns, of particular importance when
an impaired monetary transmission mechanism hinders the effectiveness of
monetary policy. Furthermore, countries with significant ("twin") current
account and budget deficits and automatic stabilizers face the additional
challenge of a lower fiscal multiplier during a down-cycle, at a time when a
more accommodative fiscal stance would be required and more appropriate.
6. Advanced
economies are projected to see their share in world GDP decline from 75 percent
in 2000 to 54 percent in 2016 (IMF WEO September 2011). Emerging markets are
projected to produce twice as much additional GDP on average through 2016 as
advanced economies. The importance of emerging markets, as a driver of economic
growth, a major consumer of goods, and increasingly as a global price setter
and a rising repository of technological innovation, has not been consistently
incorporated into economic analyses, market views, and policymaking. Emerging
markets continue to be portrayed as disproportionately vulnerable to global
economic trends, despite their remarkable resilience since the onset of the
global financial crisis and growing importance and influence in shaping global
trends.
7. The
secular forces of globalization and the increasing weight of international
trade as a share of total global economic activity, with the advent and growth
of intra-emerging trade, further substantiate the growing importance of
emerging and developing economies for the global economy, and warrant a greater
voice and more equitable role for these countries within multilateral
institutions and coordinated global policymaking.
8. Since the start of the millennium,
many emerging countries have taken advantage of their healthier balance sheets
and engaged in sterilized FX interventions, serving the dual purpose of
minimizing local exchange rate appreciation and building reserves, which helped
finance fiscal stimulus in the throes and aftermath of the global recession.
9. A
profound transformation has been taking place in recent years in favor of local
currency bond markets as an alternative, increasingly scalable means of
financial intermediation for some emerging market countries. For domestic
issuers, local currency markets reduce maturity and currency mismatches; for
foreign investors, they potentially provide risk-adjusted returns superior to
almost all global asset classes, with additional benefits from diversification.
The market has seen impressive growth in market size and depth over the past
decade, especially in developing Asia with the advent of the offshore RMB
market based in
10. The
strong performance of local currency bonds over the last two years, despite
tough exogenous challenges such as the US fiscal crisis and ongoing turmoil in
the Eurozone, is at least as much an indication of the positive fundamentals of
emerging economies and domestic bond markets' development and maturity as it is
a reflection of exceptionally low yields in advanced countries; the former
provide structural, longer-term tailwinds, whereas the latter may be cyclical
in nature, and could provide potential headwinds in the event of "the Fed
exit", for instance, causing excessive interest rate and exchange rate
volatility.
11. In
order to encourage and accommodate the development, growth and increasing
international integration of local markets, where appropriate, steps must be
taken to:
-
ensure robust market
infrastructures, with efficient and transparent clearing and settlements
systems;
-
develop standardized, liquid
exchange-traded derivatives, in order to facilitate the hedging of,
particularly but not exclusively, interest rate, currency, stock market, and
local commodity risks;
-
assure adequate market
liquidity during both normal and exceptional trading conditions;
-
clearly define rules,
regulations, and oversight;
-
develop and maintain
transparent and efficient systemic-risk
monitoring and management systems for both banks and domestic institutional
investors, and a flexible yet predictable macro-prudential tool kit consistent
with Basel III implementation;
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