China, US rate hike loom over global finance summit

[WASHINGTON] The global finance summit next week in Lima will try to scatter the clouds over the economy, beset by a slowing China and the prospect of higher US interest rates.

"On the economic front, there is... reason to be concerned," the head of the International Monetary Fund, Christine Lagarde, said Wednesday, in a speech ahead of the IMF and World Bank annual meetings in the Peruvian capital that gather the world's central bankers and finance ministers.

"The prospect of rising interest rates in the United States and China's slowdown are contributing to uncertainty and higher market volatility," Ms Lagarde said.

The new IMF global economic forecasts, which will be published on Tuesday, and the statement from the Group of 20 finance chiefs, expected on Friday, likely will reflect the gloom hovering most of all over the emerging-market economies - China at the forefront - upstaging the Greek and Ukrainian crises.

Already shaken by market turmoil, China, the world's second-largest economy, likely will have its weakest growth in 25 years this year, a downdraft threatening to pull many other countries in its wake.

China's slowdown has hammered prices on commodities such as oil and copper, eroding the financial resources of the countries that export them.

The result: Economies closely linked with China have fallen into recession, like Brazil, or been pushed to its brink, like South Africa.

"It is difficult to gauge the possible negative confidence effects on the other emerging-market economies and the global economy as a whole," said Andreas Dombret, a member of the executive board of the Bundesbank, Germany's central bank.

Coupled with the woes in Russia, the bottom line appears clear: After driving growth in the global economy during the 2008-2009 crisis, the major emerging economies, with the exception of India, are sputtering.

That was the conclusion of the Organisation for Economic Cooperation and Development when it slightly lowered its forecasts for global growth in mid-September.

"Economic recovery is progressing in the world's advanced economies, but stagnating world trade and deteriorating conditions in financial markets are curbing growth prospects in many of the major emerging economies," the OECD said.

Emerging economies also appear in the line of fire from the Federal Reserve's plan to raise interest rates for the first time since 2006, an issue expected to be discussed at length at the Peruvian pow-wow.

The rate rise, on the Fed's radar for this year despite IMF objections, could drive investors to pull funds from emerging countries into the United States and further strengthen the strong dollar, the currency on which the debt of many companies is based.

Companies in emerging economies, where corporate debt has quadrupled in the past 10 years, according to the IMF, could pay a steep price, forced into bankruptcies that hit banks and public finances. "A vicious cycle," Lagarde said.

"They would do well to buckle their seat belts in case the ride gets bumpy," the World Bank recently warned.

Despite the dark clouds, the globe's finance leaders may have some reasons to find comfort in Peru, the first South American country to host the annual IMF-World Bank meetings in nearly 50 years.

The United States, the largest economy, seems to be doing modestly well, while two major international issues could see advances during the 188-nation meetings on October 9-11, which will include multiple forums, conferences and news conferences.

Two months ahead of the Paris global climate summit, the finance chiefs may provide details on their $100 billion annual contribution, pledged in Copenhagen in 2009, to fight against global warming.

"Has that pledge been met and how is that calculated, that will be a big topic," said Jennifer Morgan, director of the climate program at the World Resources Institute, a nongovernmental organization.

In Lima, the G20 finance officials also are expected to approve a broad action plan aimed at battling multinationals' strategies to reduce their tax burdens and shelter profits in tax havens.

These tax dodges are "a form of corruption that hurts the poor" by depriving their countries of public revenues, World Bank President Jim Yong Kim said Thursday.

The G20 agreement would be finalized in November in Turkey at a summit of the leaders of the major advanced and emerging economies.

AFP