Housing Bubbles: An Ounce of Prevention is Worth a Pound of Cure

By Kevin Fletcher and Peter Kunzel

The main features of boom-bust cycles in housing markets are by now all too familiar.

During booms, conditions such as lax lending standards and low interest rates help drive up house prices and with them mortgage debt.

When the bust arrives, over-indebted households find themselves underwater on their mortgages— owing more than their homes are worth.

Feeling the pinch of reduced wealth and access to credit, households, in turn, rein in consumption. At the same time, lower house prices cause investment in new houses to tumble.

Together, these forces significantly depress output and increase unemployment. Non-performing loans increase, and banks respond by tightening credit and lending standards, further depressing house prices and adding to the vicious cycle.

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In Mozambique—and In Africa—Rising Requires Resilience

Doris RossBy Doris Ross

Three months ago African leaders and policymakers assembled in Mozambique under an “Africa Rising” banner to assess the continent’s strong economic performance. But while the outlook for the continent remains strong, individual countries have faced problems and the uncertain global outlook continues to pose risks. Against this backdrop, what are the policies that Africa should pursue to sustain the positive momentum for the continent?

In reality, Africa Rising has never been about unbridled optimism; it has been a tale of strong growth tempered by serious challenges. And rising in economic terms is as much about sustaining expansion as about the dimensions of growth itself. The extended process of African development also requires increased resilience to shocks, and it is this resilience that may be tested by economic problems in some African nations.

Strong growth—and increased resilience—were the focus of the Africa Rising conference organized in May by the IMF and the government of Mozambique in Maputo. The nearly 1,000 officials, corporate executives, civil society representatives, and journalists who gathered for the two-day event discussed the difficult issues that must be addressed if Africa is to maintain its upward trajectory of the past two decades.

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Emerging Market Corporate Sector Debt: A Stitch in Time Could Save Billions

By Julian Chow and Shamir Tanna

(Versions in Español)

Much has been said lately about growing private sector debt in emerging market economies. In our recent analysis, we examined the corporate sector in a number of countries and found their rising levels of debt could make them vulnerable.

Low global interest rates in the aftermath of the global financial crisis and ample amounts of money pouring in from foreign investors have enabled nonfinancial corporations to raise record levels of debt.

figure 1

Credit was readily available in the aftermath of the crisis, and economic expansion enabled earnings to grow healthily, thus helping to prevent leverage from rising too far and too fast.  Recently though, slowing growth prospects are beginning to put pressure on firms’ profitability. Moreover, higher debt loads have led to growing interest expense, despite low interest rates. As a result, the ability of firms to service their debt has weakened (Figure 1).

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Arab Economic Transformation Amid Political Transitions

Masood Ahmed #2By Masood Ahmed

(version in عربي)

The International Monetary Fund released today a new paper entitled “Toward New Horizons—Arab Economic Transformation amid Political Transitions.”

The paper makes the case for the urgency of launching economic policy reforms, beyond short-term macroeconomic management, to support economic stability and stronger, job-creating economic growth in the Arab Countries in Transition—Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen.

These countries face the risk of stagnation if reforms are delayed further.Economic conditions have deteriorated from transition-related disruptions, regional conflict, an unclear political outlook, eroding competitiveness, and a challenging external economic environment.

As economic realities fall behind peoples’ expectations, there is a risk of increased discontent. This could further complicate the political transitions, impairing governments’ mandates and planning horizons and, consequently, their ability to implement the policies necessary to catalyze the much-needed economic improvements.

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Less Red Tape, More Credit: How the Private Sector Can Flourish in the Middle East

Min ZhuBy Min Zhu

(Versions in عربي)

To almost all economists it is clear that the private sector is critically important in creating jobs and achieving strong growth. The public sector is already overburdened in most countries. But what is not clear is how to support the private sector for it to play this important role.

To shed some light on how to facilitate strong job creation and growth by the private sector in the Middle East and North Africa, we held a conference in Riyadh, Saudi Arabia, in December 2013, jointly with the Council of Saudi Chambers and the International Finance Corporation.

As the date of the conference approached, registrations kept increasing, and by the time we opened the conference, the registration numbers had skyrocketed to more than 800! I can think of no better sign of the importance of this topic for the people in this region.

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The Power of Cooperation

In an article in the new issue of Finance & Development magazine, President Bill Clinton shares his experience working with governments, business, and civil society as part of his Clinton Global Initiative. He says they are making the most progress in places where people have formed networks of creative cooperation where stakeholders come together to do things better, faster and cheaper than any could alone.

Bridging the Gap: How Official Financing Can Ease the Pain of Adjustment

As I step down from my position as Director of the IMF’s Western Hemisphere Department, I would like to share some reflections on one of the central issues facing many countries—adjustment under fixed exchange rates. It goes without saying that these reflect a personal and not an institutional view. In the old days, fixed exchange rates were the norm rather than the exception. A body of literature and a wealth of country experience have accumulated on how to adjust under such exchange rate regimes, mostly in emerging economies. The expression “adjustment and financing” came to summarize what economies should do when faced with severe funding constraints brought on by high borrowing costs for government debt in financial markets.

Mind The Gap: Policies To Jump Start Growth in the U.K.

The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis. Our analysis shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP.

Seven Billion Reasons to Worry: the Financial Impact of Living Longer

Everyone wants at some point to stop working and enjoy retirement. In these uncertain economic times, most people worry about their pension. Now take your worries and multiply those several billion times. And the problem is likely bigger still: although living longer, healthier lives is a good thing, how do you afford retirement if you will live even longer than previously thought?

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