Sovereign Wealth Funds in the New Era of Oil

By Rabah Arezki, Adnan Mazarei, and Ananthakrishnan Prasad 

(Versions in عربي and 中文)

As a result of the oil price plunge, the major oil-exporting countries are facing budget deficits for the first time in years. The growth in the assets of their sovereign wealth funds, which were rising at a rapid rate until recently, is now slowing; some have started drawing on their buffers.

In the short run, this phenomenon is not cause for alarm. Most oil exporters have enough buffers to withstand a temporary drop in oil prices. But what will happen if low oil prices persist, and how will policymakers react?

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Emerging Market Corporate Debt in Foreign Currencies

By Selim Elekdag and Gaston Gelos

Debt held by firms in emerging market economies in a currency other than their own poses extra complications these days. When the U.S. Fed does eventually raise interest rates, the accompanying further strengthening of the U.S. dollar will mean an emerging market’s own currency will depreciate against the higher value of the U.S. dollar, and would make it increasingly difficult for firms to service their foreign currency-denominated debts if they have not been properly hedged.

In the latest Global Financial Stability Report, we find that firms in emerging markets that have increased their debt-to-assets ratios have generally also increased their overall sensitivity to changes in the exchange rate—commonly called exchange-rate exposure.

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The More the Merrier? What Happens When More People Use Financial Services

By Ratna Sahay, Martin Cihak, Papa N’Diaye, Adolfo Barajas, and Srobona Mitra

(Version in FrançaisEspañolعربي)

A growing number of policymakers see financial inclusion—greater access to financial services throughout a country’s population—as a way to promote and make economic development work for society. More than 60 countries have adopted national financial inclusion targets and strategies. Opening bank accounts for all in India and encouraging mobile payments platforms in Peru are just two examples. Evidence for individuals and firms suggests that greater access to financial services indeed makes a difference in investment, food security, health outcomes, and other aspects of daily life. Our study looks at the benefits to the economy as a whole.

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Financial Risks Rise Amid Uneven Global Economic Recovery


By José Viñals

(Versions in عربي and Español)

The three main messages from this Global Financial Stability Report are:

  1. Risks to the global financial system have risen since October and have rotated to parts of the financial system where they are harder to assess and harder to address.
  2. Advanced economies need to enhance the traction of monetary policies to achieve their goals, while managing undesirable financial side effects of low interest rates.
  3. To withstand the global crosscurrents of lower oil prices, rising U.S. policy rates, and a stronger dollar, emerging markets must increase the resilience of their financial systems by addressing domestic vulnerabilities.

Let me now discuss these findings in detail. 

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Four Forces Facing the Global Economy

WEOBy Olivier Blanchard 

(Versions in عربي and Español)

In our April 2015 World Economic Outlook, we forecast global growth to be roughly the same this year than last year, 3.5% versus 3.4%.   This global number reflects an increase in growth in advanced economies, 2.4% versus 1.8%, offset by a decrease in growth in emerging market and developing economies, 4.3% versus 4.6% last year.   In short, to repeat the words used by the IMF Managing Director last week, we see growth as “moderate and uneven”.

Behind these numbers lies an unusually complex set of forces shaping the world economy.  Some, such as the decline in the price of oil and the evolution of exchange rates, are highly visible.  Some, from crisis legacies to lower potential growth, play more of a role behind the scene but are important nevertheless.  Let me briefly review them.

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The Promise of Islamic Finance: Further Inclusion with Stability

By Mohamed Norat, Marco Pinon and Zeine Zeidane

(Versions in عربي)

Since the global financial crisis, policymakers have sought to press the “reset” button to strengthen financial intermediation that is performed by conventional banks and non-bank financial institutions. The aim has been to address the fault lines that helped trigger one of the most devastating financial crises in a century, and to enable a more inclusive, stable financial system that promotes stability as well as economic development and growth.

Islamic finance offers several features that are consistent with these objectives. Islamic finance refers to financial services that conform with Islamic jurisprudence, or Shari’ah, which bans interest, speculation, gambling and short-sales; requires fair treatment; and institutes sanctity of contracts. And these principles hold the promise of supporting financial stability, since a key tenet of Islamic finance is that lenders should share in both the risks and rewards of the projects and loans they finance. 

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Seven Questions About The Recent Oil Price Slump

By Rabah Arezki and Olivier Blanchard[1]

(Versions in عربي中文, Français, 日本語Русский, and Español)

Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers.  Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.  

In summary: 

  • We find both supply and demand factors have played a role in the sharp price decline since June. Futures markets suggest that oil prices will rebound but remain below the level of recent years. There is however substantial uncertainty about the evolution of supply and demand factors as the story unfolds.
  • While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.
  • Risks to financial stability have increased, but remain limited. Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela. Given global financial linkages, these developments demand increased vigilance all around.
  • Oil exporters will want to smooth out the adjustment by not curtailing fiscal spending abruptly. For those without savings funds and strong fiscal rules, budgetary and exchange rate pressures may, however, be significant. Without the right monetary policies, this could lead to higher inflation and further depreciation. 
  • The fall in oil prices provides an opportunity for many countries to decrease energy subsidies and use the savings toward more targeted transfers, and for some to increase energy taxes and lower other taxes.  
  • In the euro area and Japan, where demand is weak and conventional monetary policy has done most of what it can, central banks forward guidance is crucial to anchor medium term inflation expectations in the face of falling oil prices.

Again, our simulations of the impact of the oil price drop do not represent a forecast for the state of the world economy in 2015 and beyond. This we will do in the IMF’s next World Economic Outlook in January, where we will also look at many other cross-currents driving growth, inflation, global imbalances and financial stability. 

What follows is our attempt to answer seven key questions about the oil price decline:

  1. What are the respective roles of demand and supply factors?
  2. How persistent is this supply shift likely to be?
  3. What are the effects likely to be on the global economy?
  4. What are likely to be the effects on oil importers?
  5. What are likely to be the effects on oil exporters?
  6. What are the financial implications?
  7. What should be the policy response of oil importers and exporters?

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