Will another taper tantrum hit emerging markets?
In early July, the yield on U.S. 10-year Treasury bonds fell to its lowest level in four months, and stock markets dipped on fears that this year’s rosy projections for economic growth will not be borne out. Still, the prevailing view is that the recent spike in inflation will be transitory, allowing the U.S. Federal Reserve to pursue a smooth unwinding of its balance sheet at some point in the future.
This month’s market episode can be partly traced back to February and March of this year, when U.S. long-term rates rose in anticipation that the Fed might soon start tightening its monetary policy. With U.S. President Joe Biden’s large fiscal packages came new fears about inflation and economic overheating. Ten-year Treasury yields duly rose from below 1.2 percent to close to 1.8 percent before stabilizing and falling back to previous levels this month.
Though there were some jitters following the June meeting of the policy-setting Federal Open Market Committee, when some FOMC members assumed a more hawkish attitude, the Fed nonetheless managed to keep markets cool by promising to give plenty of advance notice before beginning to taper its monthly bond purchases. Since then, interest rates have declined at a notable pace.
Rather than worrying about another taper tantrum, we should be more concerned with the slow pace of immunizations leading to an anemic post-pandemic recovery; commodity price hikes generating inflation; and economic strategies that merely restore the low growth rates of the pre-pandemic era.
But uncertainties remain for emerging markets, most of which suffered capital flight as a result of the February-March tantrum and the attendant hike in U.S. market interest rates. Although these outflows have since reversed, there is always a possibility that the Fed will feel obliged to change tack, leaving open the question of whether we are heading for another “taper tantrum” of the kind that shook global markets in 2013.
Recall that in June of that year, then-Fed Chair Ben Bernanke suggested that the FOMC might soon start to slow down its bond purchases. With that one passing statement, Bernanke unwittingly triggered a wave of interest-rate hikes and capital flight from emerging markets.
At the time, the “fragile five”—South Africa, Brazil, India, Indonesia, and Turkey—had high current-account deficits and a strong dependence on inflows of foreign capital. For years, they had experienced the spillover effects of ultra-loose U.S. monetary policies, which sent investors seeking higher yields in emerging markets. When Bernanke raised the possibility of gradual monetary-policy tightening, investors briefly panicked.
Another bout of capital outflows from emerging markets occurred in May 2018, when the Fed really did start to reduce its asset holdings; but this tapering—followed by a sell-off in U.S. bond markets and dollar appreciation—was halted in 2019. This time, the “fragile five” had been reduced to the fragile two of Turkey and Argentina, which both had high current-account deficits and an acute vulnerability to exchange-rate fluctuations, owing to their large volumes of foreign-currency debt.
That brings us back to this year. According to the Institute of International Finance, the February-March market tantrum was enough to generate a significant reduction in non-resident portfolio flows to emerging markets. Although these losses were partly recovered over the following three months, worries of a “taper tantrum 2.0” will remain salient over the next two years, especially if it starts to look like the Fed will tighten faster than it is currently projecting.
But it is important to remember that we are no longer in 2013. Back then, the fragile five’s current-account deficits averaged around 4.4 percent of GDP, compared to just 0.4 percent today. Moreover, the flow of external resources into emerging markets in recent years has been nowhere close to as large as in the years before the 2013 tantrum. Nor are real exchange rates as overvalued as they were then. With the exception of Turkey, the fragile five’s gross external financing needs as a proportion of foreign reserves have fallen substantially.
Two additional mitigating factors are also worth considering. First, if stronger economic growth drives up U.S. interest rates, positive trade linkages for some emerging markets might help to offset any negative financial spillover. Second, it is reasonable to assume that the Fed will offer more appropriate “signaling” this time around, thereby minimizing the risk of another panic episode.
What about the problem of “twin deficits” in many emerging economies? One cannot dismiss the fact that emerging markets suffered large capital outflows last year just as their fiscal deficits were rising in response to the pandemic. But despite the COVID-19 crisis, emerging markets generally have been able to finance their larger fiscal deficits by relying on domestic investors and, in some cases, their central banks. And starting in the second half of 2020, purchases of government securities by non-residents in some emerging markets started to pick up again.
True, because some issuance of foreign-currency-denominated securities may still be necessary, the risks associated with changing foreign-exchange flows have not been eliminated entirely. Countries like Colombia and Chile still have relatively high levels of dollar-denominated debt, and in some emerging markets, portfolio inflows will remain crucial to financing fiscal deficits.
But, ultimately, the bigger risks facing emerging markets lie elsewhere. Rather than worrying about another taper tantrum, we should be more concerned with the slow pace of immunizations leading to an anemic post-pandemic recovery; commodity price hikes generating inflation; and economic strategies that merely restore the low growth rates of the pre-pandemic era.
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A golden opportunity to end destructive fishing subsidies
It is not often that trade negotiators get a chance simultaneously to protect vulnerable people and their livelihoods, promote healthier oceans, and fulfill one of the United Nations Sustainable Development Goals. But that is exactly the opportunity awaiting trade ministers as they gather at the World Trade Organization this week to discuss new global rules limiting government support for the fishing industry.
These public subsidies incentivize overfishing, and WTO members have been debating how to limit them for 20 years now. During those long two decades, global fish stocks have decreased sharply, and poor and vulnerable artisanal fishers have suffered along with ocean ecosystems.
In 2017, the U.N. Food and Agriculture Organization (FAO) warned that an estimated one-third of global fish stocks were overfished, an increase from 10 percent in 1970 and 27 percent in 2000. The depletion of fish stocks threatens the food security of low-income coastal communities and the livelihoods of poor and vulnerable fishers, who must travel farther and farther from shore only to bring back smaller and smaller hauls.
In 2017, the U.N. Food and Agriculture Organization (FAO) warned that an estimated one-third of global fish stocks were overfished, an increase from 10 percent in 1970 and 27 percent in 2000.
Despite these disturbing findings, governments continue to disburse around $35 billion in annual fisheries subsidies, two-thirds of which go to commercial fishers. In doing so, they are keeping at sea many commercial vessels that would otherwise be economically unviable.
World leaders recognized the seriousness of the problem back in 2015 when they agreed to forge an agreement on fisheries subsidies by 2020 as part of the Sustainable Development Agenda. But while trade ministers reaffirmed this pledge in 2017, talks at the WTO have repeatedly stalled.
Over the past year, however, things have begun to turn around. Political leaders and trade ministers from around the world tell me they want to get an agreement done this year. In Geneva, the chair of these negotiations, Ambassador Santiago Wills of Colombia, has worked with WTO members to draft a negotiating text that I believe can provide the foundation for final-stage talks. But despite the political support voiced by government leaders, important divisions persist. Indeed, as matters stand, we are in danger of failing to conclude a deal before the WTO’s year-end Ministerial Conference.
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This tight timetable is the reason for convening trade ministers this month. While no one expects a miracle, the meeting represents a golden opportunity to bring the negotiations within striking distance of a deal. WTO members need to conclude an agreement in time for the U.N. Biodiversity Conference in October, and no later than the end of November, when the WTO’s own ministerial begins. A failure to do so would jeopardize the ocean’s biodiversity and the sustainability of the fish stocks on which so many depend for food and income.
Yes, the talks are complex, because fish do not inhabit a single national territory or observe maritime boundaries. WTO negotiators must account for both the existing framework of international fisheries rules and the role of the regulatory bodies that govern many aspects of fishing around the world. They also must define how new subsidy rules would apply to far-flung fishing vessels.
By negotiating away harmful fisheries subsidies, WTO members will not just be honoring past commitments. They will also be lending momentum to other international efforts to address problems in the global commons—from climate change to the COVID-19 pandemic.
Compounding the challenge is the fact that the WTO is not a fisheries management organization. Still, the WTO has a longstanding framework of rules that curb trade-distorting subsidies for industrial and agricultural goods. That is why trade ministers agreed back in 2001 to come up with similar measures to protect marine fisheries.
Although there is still work to do, the current draft negotiating text would make an important contribution to the sustainability of our oceans. For starters, it would completely ban government funding for vessels that engage in illegal fishing. According to the FAO, these activities account for 11 million to 26 million tons of fish per year, or roughly 20 percent of the total global catch. The agreement would also rein in other types of subsidies that support increased fishing activity, by requiring that governments prove they have taken steps to ensure such support does not harm fish stocks.
One of the toughest issues in the negotiations is how to define and honor the original negotiating mandate guaranteeing special and differential treatment for developing countries—and especially for least-developed countries. Many of these countries rely on small-scale artisanal fishing, and they are seeking more policy space to develop their industrial fishing capabilities. But, because their fisheries management capacity is weak, they may struggle to implement new subsidy regimes as quickly and effectively as better-off members can.
Another tough issue is to ensure transparency, with requirements that a member offer notification when deploying non-harmful and non-distortionary subsidies to encourage its fishing industry. Tackling these issues will not be easy, but tackle them we must, because WTO members have pledged to protect the fisheries and ocean we all share.
By negotiating away harmful fisheries subsidies, WTO members will not just be honoring past commitments. They will also be lending momentum to other international efforts to address problems in the global commons—from climate change to the COVID-19 pandemic.
Let’s hope that the world’s trade ministers rise to the challenge.
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