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There are two timeframes within which to consider the impact of the latest interest rate increase by the US Federal Reserve of 0.25%, the first rise in a year, and likely a herald of more rises to come in 2017. And the potential impact differs, depending on which timeframe you choose.
In the short run I think there is going to be very little impact on emerging markets for a number of reasons, the most important being that this has been fully anticipated. The Federal Reserve has basically been almost close to announcing that this was going to happen.
But another reason emerging markets need not lose much sleep over this rate increase right now is that the rate is still very low. It is at 0.75% in the US, and, in addition, there is no perception or expectation that rates are about to rise in other advanced economies such as Japan or the EU. Taken together then, interest rates in advanced economies look set to stay extremely low. So, for now at least, emerging markets may not need to worry too much about capital inflows drying up.
But in the medium to long term a problem may loom for emerging markets. Low interest rates in advanced economies mean rates in emerging markets are relatively higher, attracting capital inflows, mainly through the vehicles of bonds and equities issued by emerging markets. This increases the ratio of debt to GDP in those developing economies, and, crucially, their level of indebtedness in dollars.
If the US Fed continues to raise interest rates, as many expect it to do this year and beyond, the dollar will appreciate further and emerging markets will have to pay back their debt at the higher level of the dollar. The same amount of debt could end up costing them more. Moreover, emerging markets’ availability of external finance might decrease significantly as the interest rate spreads between emerging market debt and US Treasuries may no longer be attractive for investors.
What should emerging markets do? This is the time for Central Banks to act counter-cyclically. In the context of the economic slowdown that many emerging markets are experiencing, lowering domestic interest rates in the short run is appropriate. This will have the double effect of supporting economic growth as well as discouraging excessive and, most importantly, transitory inflows of capital, especially towards debt instruments. This policy prescription is possible at this juncture because inflation rates remain low in many emerging market economies.
As US interest rates normalize to higher levels, emerging markets need to consider increasing their domestic interest rates to dampen the dry-up of capital flows. This policy response will, of course, depend on economic conditions at the time. If emerging markets manage to keep their houses in order, they might be able to show that counter-cyclical policies can serve as an effective defense mechanism against the vagaries of policies in advanced economies.
Hay dos marcos temporales para considerar el impacto del último aumento de la tasa de interés de la Reserva Federal de EE.UU. de 0.25%, el primer aumento en un año, y probablemente un anunciamiento de próximos aumentos en 2017. Y el impacto potencial difiere en función del marco temporal que elijas.
En el corto plazo creo que habrá un impacto muy limitado en los mercados emergentes por una serie de razones, siendo la más importante que esta política ya ha sido totalmente anticipada. La Reserva Federal ha estado básicamente próximo a anunciar que esto iba a suceder.
Pero otra razón por la que los mercados emergentes no deberían preocuparse mucho por el incremento de la tasa por ahora es que la tasa sigue estando muy baja. Está en 0.75% y, además, no hay expectativa de que las tasas vayan a subir en otras economías avanzadas como Japón o la Unión Europea. Entonces, parece que las tasas de interés en las economías avanzadas aún se mantendrán extremadamente bajas. Por lo tanto, por ahora al menos, los mercados emergentes no necesitan preocuparse demasiado de que los capitales dejen de entrar.
Pero en el mediano y largo plazo un problema podría surgir para los mercados emergentes. Las tasas de interés bajas en las economías avanzadas implican que las tasas en los mercados emergentes son relativamente más altas, atrayendo capitales, principalmente a través de la emisión de bonos y acciones por los mercados emergentes. Esto aumenta el ratio de deuda al PIB en las economías en desarrollo y, fundamentalmente, su nivel de endeudamiento en dólares.
Si la Fed de EE.UU. sigue subiendo las tasas de interés, como muchos esperan para este año y más adelante, el dólar se apreciará aún más y los mercados emergentes tendrán que repagar su deuda a un dólar más caro. La misma cantidad de deuda podría terminar costándoles más. Además, la disponibilidad de financiamiento externo de los mercados emergentes podría disminuir significativamente a medida que los diferenciales de tasas de interés entre la deuda de los mercados emergentes y los bonos del Tesoro de EE.UU. dejen de ser atractivos para los inversionistas.
¿Qué deberían hacer los mercados emergentes? Este es el momento para que los Bancos Centrales actúen de manera contracíclica. En el contexto de la desaceleración económica que están experimentando muchos mercados emergentes, es conveniente reducir las tasas de interés domésticas de corto plazo. Esto tendrá el doble efecto de estimular el crecimiento económico y desalentar las entradas excesivas y transitorias de capitales, especialmente hacia instrumentos de deuda. Esta prescripción de política es posible en esta coyuntura porque las tasas de inflación siguen siendo bajas en varias economías de mercados emergentes.
A medida que las tasas de interés de EE.UU. se normalizan a niveles más altos, los mercados emergentes deben considerar el aumento de sus tasas de interés domésticas para amortiguar los efectos de una menor entrada de capitales. Esta respuesta de política dependerá, por supuesto, de las condiciones económicas en su momento. Si los mercados emergentes logran mantener las cosas en orden, podrían mostrar que las políticas contracíclicas pueden servir como un mecanismo de defensa eficaz contra las políticas en las economías avanzadas.
The shareholders of the private finance operations or windows (PSWs) of the multilateral development banks (MDBs) expect them to pursue three objectives simultaneously: (1) market returns, (2) high mobilization rates (dollars of private finance raised per PSW dollar committed), and (3) high development impact. It is no surprise that in the real world there are often tradeoffs among these objectives. Yet shareholders send mixed messages about where their priorities lie. The actual PSW track records suggest more success on objective (1) than on (2) and (3).
This confused status quo becomes untenable in the context of the enormous challenges of financing the Sustainable Development Goals (SDGs), the disappointing data and trends for actual private finance flows for development, limited aid dollars, and tight fiscal constraints on developing country government capacity to fund infrastructure and other development spending. A 2018 report estimates that a total of $60 billion of private finance was mobilized by PSWs in 2016, hardly a sufficient contribution to addressing annual SDG financing gaps in the trillions.
Some inside and outside these institutions are urging them to evolve from lenders to mobilizers—a change that does not mesh well with PSW financial models that favor profitable lending for their own account. Guarantees, for example, account for only about 5 percent of PSW commitments but generate about 45 percent of private finance mobilized.
All this suggests an urgent need to change PSW business models to maintain their financial sustainability while doing much better on mobilization and development impact. Two factors are critical for meeting this challenge: enhanced risk management capability and greater flexibility regarding risk-adjusted returns. Crowding the private sector into projects with high development impact can be advanced by disciplined use of blended finance to reduce or share risk, boost returns, or form a partnership in which one party accepts delayed or below-market risk-adjusted returns.
Adapting the PSW model
PSWs need a better way to be effective and efficient partners in blended finance arrangements. To this end, I have proposed that special purpose vehicles (SPVs) with separate balance sheets be added to the PSW toolkit. They would be purpose-built for taking on more risk, while the core PSW balance sheets would retain their AAA rating and their profitability. The SPVs would target pervasive gaps in capital markets such as limited early-stage finance for firms, local capital markets, and pre-operational infrastructure projects; and scarce finance for the riskiest project tranches like junior equity or debt. The SPV financial goal would be simply to preserve shareholder equity at the entity level.
The basic idea is for the two parts of the PSW—the SPV and core operations—to offer a seamless continuum of products and services to clients. In some cases, this would make deals bankable that otherwise would not pass credit committees. In others, it would make scale and larger deals possible. And in still others, it would mean a smooth handoff from the SPV to the core PSW operations when clients or markets are ready for commercial finance and growth.
Capitalizing such SPVs would offer attractive features to MDB PSW shareholders:
The new capital requirement would be relatively small compared to PSW core balance sheet needs.
The resources funding the SPV would take the form of shareholder capital rather than one-time contributions to individual donor trust funds or reliance on IDA replenishment resources. SPV capital adequacy and the need for possible capital increases could then be periodically assessed.
The SPV shareholder and governance structure could be established de novo, that is, without dilution worries for shareholders that do not wish to participate.
Shareholders would be deploying their new capital in a way that directly advances the institutional change they seek—more openness to innovation, more mobilization, and a greater focus on areas and projects with high development impact.
A better approach than creating an SPV for each MDB would be to establish just one SPV that all MDBs could access. It could be structured in a way that facilitates both collaboration across MDBs to gain more access to SPV resources as well as healthy competition to ensure that the best projects are selected.
One other desirable innovation would be to allow private investors to participate in capitalizing the SPV. A public-private SPV would give risk-tolerant private impact investors and philanthropists a chance to participate in funding projects where mobilization and development impact are high. For their part, public shareholders would not have to bear the whole burden of capitalizing the SPV. Private shareholders would of course then rightly expect to have a seat at the governance table. This seems both logical and sensible if public and private shareholders are united around the same mission. As we’ve seen in other public-private partnership spheres, the private sector can introduce efficiencies and innovation that accelerate institutional change.