What happens if advanced economies remain stuck in a long-lasting funk marked by tepid growth, low interest rates, aging populations and stagnant productivity? Japan offers an example of the impact on banks, and our analysis suggests that there could also be far-reaching consequences for insurance companies, pension funds, and asset-management firms.
A few days after the first sunrise of 2012 kissed the shores of Latin America, it is natural to ask: What does the New Year hold for the region’s economies, especially with Europe still under stress? For sure, a dimmer economic environment, here and abroad. Growth has softened in the larger countries of the region. Looking North, the United States is growing a bit more, but elsewhere activity is softening, including in China—an increasingly important customer for the region’s commodities. Perhaps more importantly, global financial markets are still strained, because many questions about advanced economies remain unanswered. What should countries do in the face of this risky outlook? A lot depends on their current macroeconomic situation.
Sub-Saharan Africa’s “frontier markets”—the likes of Ghana, Kenya, Mauritius, and Zambia—were seemingly the destination of choice for an increasing amount of capital flows before the global financial crisis. Improving economic prospects in these countries was a big factor, but frankly, so too was a global economy awash with liquidity. Then the crisis hit. And capital—particularly in the form of portfolio flows—was quick to flee these countries as was the case for so many other economies. Fast forward to 2011. Capital flows are coming back to the frontier, but in dribs and drabs. In our recent Regional Economic Outlook we examined the experience of sub-Saharan Africa’s frontier markets, with a view to understanding how they can best make use of these inflow to meet their own development and growth objectives.
Abundant global liquidity and high exposure to capital movements have put foreign exchange intervention at center stage of the policy debate in Latin America. Although intervention is widely used, there is limited evidence about its effects on the exchange rate (particularly in terms of slowing the pace of currency appreciation). In the latest Regional Economic Outlook: Western Hemisphere we took a fresh look at intervention practices and effectiveness for a group of economies in Latin America and other regions during 2004-10. Our analysis suggests that foreign exchange market interventions may help to mitigate appreciation temporarily. However, the impact depends on the circumstances and characteristics of each country.
The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets. Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down. But, it only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. The key then is to make sure that firms have less incentive to pull the plug. To do that, in the latest Global Financial Stability Report, we have come up with a way to measure how much an individual financial institution contributes to system-wide liquidity risk.