De Rato warns on inflation and slowdown

21/10/2007 | Taimur Ahmad, Anthony Rowley

Fund chief weighs the risks as US engine falters

Rodrigo de Rato, the IMF managing director, has reiterated that “growth deceleration” in the US, and the knock-on effects in emerging markets, are central concerns, in an interview with Emerging Markets. He also highlighted the danger from inflationary pressures.

The recent credit crisis “has had a limited impact up to now” on emerging economies’ finances, he said. “In many cases spreads, currencies and equity markets have come back and are even higher.” But downside risks have increased.

“These have different origins”, de Rato said. “One could be a growth deceleration, linked to a higher-than-expected deceleration in the US. Right now we don’t see a recession in the US, although the real estate and housing market is very weak, and the rest of the economy is not. We see it because of the evolution of the dollar and the strength in exports.”

There is, though, a risk that “the worst scenario [i.e. recession] will materialize, and that will have an impact on world growth and will affect exporters and commodity prices, the main engines of growth in the developing world”. The other danger for emerging economies is that financial tightness in industrial countries will spread into the world economy, de Rato added.

Inflation is also worrying, said the outgoing IMF head – “because of tight labour market conditions and output gaps, because energy continues to be very expensive and food is becoming a challenge in many countries, and because of higher commodity prices”.

Two other risks are protectionism, following the breakdown of the multilateral trade negotiations, and an evolution of global imbalances.

Asked whether the resurgence of the yen carry trade is a concern, de Rato said: “The difference in interest rates, and low expectations of abrupt changes in currency values, make investors take more aggressive strategies. [...] One-way bets on currencies is a very risky business. Things can change very quickly. But it seems that people come back and come back.”

On IMF reform, de Rato said that the quota package agreed at the annual meetings in Singapore last year would be implemented next year, not this year.

“It is not by chance that no other multilateral organization is facing the change in governance that we are”, he said. “These meetings will be able take stock of the willingness of countries not only to give more voice to emerging economies as a whole – because it is now very clear that, irrespective of what happens to this or that country, that emerging economies as a whole should have more voice – but also how it will be done, i.e. whether on a GDP or PPP basis.

“It has also been agreed that this is the crucial issue. That may sound very technical, but it has strong political implications.”

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