Economy

‘Capital Inflows into emerging economies likely to shrink’

Dr. Andreas Bauer

“Emerging markets witnessed acceleration in 2017 and capital inflows into developing economies was high due to factors such as high growth in these economies and loose monetary policy in the advanced economies especially the US; but now monetary policy is starting to be tightened in US hence some of these flows would dry up; something which we are already witnessing” said Dr. Andreas Bauer, Senior Resident Representative of IMF for India, Nepal and Bhutan, he was addressing a panel discussion on ‘World Economy and Global Financial Stability’ organised at New Delhi’s India International Center. The panel discussion was organized by the EGROW Foundation.

He empahasised the need of the world economy to find a large growth driver like China “UK, Japan, Germany are projected to slow down during the financial year 2018-19, the major advanced economy that should witness some growth would be the US growing at about 2.9%. China would witness deceleration and it is a challenge for the world economy to find another growth driver.”

Dr. Bauer declared that financial volatility in the near future cannot be ruled out due to the fact that Central Banks of advanced countries have expanded their balance sheets “We live in unprecedented times Central banks of many advanced economies have expanded their balance sheets, even if the process goes smoothly their remains big potential for financial volatility.”

He admitted that the trade war between US and China is very much a reality and the negative impact of the same is already evident “Equity of US companies that use a lot of Chinese inputs have underperformed compared to rest of the market. China would be more affected due to this as Chinese exports to the US amounts for about 4% of its GDP, for the US it is about 0.7%.”

Dr Bauer felt that the trade war could provide an opportunity to emerging economies such as India in the short run but a prolonged trade war would be detrimental to all ” This trade war would mean that US exports to China would become more expensive and vice versa it could help other countries in the short run. For example the trade war could help boost India’s exports to the US in the short run as it fills up for the Chinese exports but a prolonged trade war could impact it adversely as that would impact financial variables such as business confidence and investment.”

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