Global finance chiefs travel to Bali to discuss inflation, debt and oil

(Bloomberg) – Financial stewards from the world’s biggest economies are landing on the tropical island of Bali this week at a time when rapid inflation threatens to further destabilize populations and turn fragile recoveries into recession.

Meetings of the Group of 20 finance ministers and central bank governors on Friday and Saturday in Indonesia will focus on a host of issues around soaring prices, threats of more sovereign defaults and engineering soft landings for investors. savings still in Covid recovery mode.

Officials will still have much to discuss, with war raging in Ukraine and US-China tensions still boiling, while seeking to advance global initiatives around green energy, digital banking and tax standards. municipalities.

Here’s a look at some of the top issues that are expected to dominate rallies:

Inflation, central bank credibility

Credited with saving the global economy from the global financial crisis a decade ago, central bankers are now being criticized for having had to catch up on tackling runaway inflation this year. More than 80 central banks have raised interest rates this year, with “giant” increases of 50 basis points or more becoming increasingly popular.

For Federal Reserve chief Jerome Powell, the “biggest mistake” is to fall further behind inflation rather than pushing the economy into recession. Other economies have weaker fundamentals and buffers than the United States, which makes decisions more volatile.

Growth issues are high on the agenda of the G-20 meetings, with two of the six priorities addressing post-Covid exit strategies to support the recovery and the scarring effects of the latest crisis.

Many central bank governors in attendance will remain silent this week given blackout rules and standards for public comment, with scheduled decisions pending. The European Central Bank, Japan and Indonesia are among those making announcements next week. The Fed typically leaves public communication to the Secretary of the Treasury at such gatherings.

Currency

Investors rushing to the safe-haven US dollar in a risky environment trigger a cascade of capital outflows, forcing officials to weigh decisions to intervene to protect their currencies.

The issue will likely take center stage with US Treasury Secretary Janet Yellen and her Japanese counterpart Finance Minister Shunichi Suzuki as the yen plummets.

Yellen has shown no willingness to greenlight intervention to defend currencies that are collapsing against the dollar. With a strong currency helping to fight imported inflation, it can be difficult to get a deal beyond statements of concern and promises of consultation.

Emerging markets pain

With limited external buffers and depleted foreign exchange reserves, low-income countries are struggling to bring down inflation as unstable populations stoke political tensions. Investors are becoming increasingly cautious, withdrawing money and in turn accelerating the strains on these economies.

A skyrocketing $237 billion in debt owed to foreign bondholders in distressed traded notes hangs over a world of developing markets that is bracing for a potential domino effect of defaults. After Russia and Sri Lanka, Bloomberg Economics now considers five economies the most vulnerable to default: El Salvador, Ghana, Egypt, Tunisia and Pakistan.

Beijing, which has become the top official lender to developing countries in recent years, has shown little enthusiasm for a new G-20 program, known as the Common Framework, intended to streamline the process of organizing creditors. to act jointly with debtors in difficulty. This intransigence drew criticism from Group of Seven finance ministers when they met in Germany in May.

The gaping divide between emerging and developed markets will be a topic of discussion among representatives of multilateral development banks.

Food safety

Several countries are particularly troubled by continuing supply problems, with Egypt, Turkey, Bangladesh and Iran depending on Russia and Ukraine for more than 60% of their wheat, according to a United Nations report published in March.

In April, during the spring meetings of the International Monetary Fund and the World Bank in Washington, the US Treasury convened a meeting of senior international financial officials and food security experts to address the worsening crisis. Participants agreed to develop a set of common principles and an action plan, but there has been little visible progress since.

Oil price caps, geopolitics

After staging a walkout when Russian officials began talking at a previous G-20 meeting, Yellen is likely to arrive in Indonesia again with a much colder stance than the host nation toward the conflict aggressor. in Ukraine.

At stake are soaring oil prices and continuing trade bottlenecks resulting from Russia’s ability to choke off global energy supplies. This week’s rally will feature a mix of those whose governments have spoken out against Russia and those who remain somewhat silent in the face of harsh economic realities.

Yellen will stand firm on ideas to mitigate risks from Russia, including an oil price cap initiative that is unlikely to garner enough support, while US President Joe Biden will visit Saudi Arabia this week to launch a revival of production.

The United States and Canada have already banned purchases of Russian oil, and the European Union has agreed to ban maritime shipments to member countries by the end of the year and to ban insurers from covering tankers that transport Russian oil all over the world.

The new proposal would create an exception to the insurance ban for shipments priced below an agreed cap, set just above Russia’s production costs. The aim is to limit Moscow’s revenue from oil exports, while keeping Russian oil on the market and preventing a further spike in world prices.

A senior US Treasury official speaking to reporters in Tokyo on Tuesday said blocking Russian oil exports through the insurance ban without price cap exceptions would significantly increase the world price of oil, possibly be around $140 a barrel. It is currently just above $100 a barrel.

Country leaders at a recent Group of Seven meeting in Germany, at Biden’s urging, agreed to explore the proposal, but the plan is seen as practically and politically complex. It would take unanimous support within the EU to enact legal changes. Agreeing on a price level would also be cumbersome. And then there are questions about whether countries like China, India and Turkey would cooperate.

Swap

Hidden in the geopolitics and trade background is the Biden administration’s cowardly promise to announce a lifting of at least some tariffs on China instituted under the Trump White House. Although this decision was announced as a new effort to reduce domestic inflation in the United States, any further signs of a reduction in these levies will be watched, especially by Asia-Pacific economies which are more closely related to China.

new global economy

A global tax deal reached last year between more than 130 countries remains dogged by implementation hurdles as politics plays out, including in the United States. While major new milestones are unlikely to be reached at these meetings, look for smaller deals that could be struck to move the issues forward toward eventual widespread adoption.

The agreement aims to prevent the world’s largest companies from evading taxes by instituting an overall minimum tax rate of 15% and also redistributing certain taxing rights so that multinationals pay more tax in countries. where they generate revenue, rather than just where they make a profit. The deal was originally supposed to come into effect by the end of 2023, but that timeline has already been scrapped.

The “building back better” era of global economic growth recovery has also consistently brought green economy issues to the fore, even as many economies grapple with the reality of crude oil dependence. .

Digital banking and financial inclusion also occupy distinct places among the half-dozen priorities set out at the meeting. These initiatives are attracting particular attention among Asian economies that have made progress on issues such as central bank digital currencies and electronic payment systems – including Indonesia and G-20 observer economies such as Singapore and China. Thailand.

©2022 Bloomberg LP


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John A. Bogar