The global economic news flow improved on several fronts over the last month. First, there are tentative signs that the global industrial cycle is beginning to stabilise. Second, the IMF reformed its arsenal of credit facilities in order to get more funds out faster and with fewer conditions attached – at least for countries with strong fundamentals. Further, at the G20 meeting earlier this month, it was decided to boost IMF’s lending resources to USD 750bn.
Manufacturing surveys have improved for most countries since January. The turnaround has been most pronounced in Asia, with the official Chinese PMI breaking the important 50-level indicating renewed expansion. We should be careful not to get too excited, as PMI levels still suggest contraction for most countries. However, Asian trade data suggest foreign trade globally has rebounded somewhat in January and February from the very depressed levels seen in early 2009. With new orders apparently running ahead of production, this suggests industrial activity should actually increase in the coming months.
The big question is to what degree this increase in industrial activity is just a temporary impact from restocking and fiscal easing – a so-called dead cat bounce. The picture is rather mixed for emerging markets: for Central and Eastern Europe (CEE) the advance is not yet visible, as the region still suffers from tight liquidity conditions on the back of the de-leveraging cycle hitting the region hard. In Asia and for some of the LATAM markets – like Brazil – there are signs of improving industrial activity on the back of low inventories and strong fiscal and monetary policy responses. A recovery in global industrial activity would be positive for the very open and export dependent Asian economies. Hence, in such a scenario we would expect the Asian currencies to outperform as has happened during the past month.
IMF’s new flexible credit line (FCL) and the trebling of IMF funds to USD 750bn in connection with the G20 meeting in London are a significant boost to emerging markets’ liquidity in a situation in which private capital flows to these markets are under strain. In addition, it underlines that the IMF’s priority, at least to some degree, is shifting to maintaining demand in emerging markets from primarily securing structural adjustments in the economies applying for IMF funds. The FCL, which replaces the more rigid short-term lending facility (SLF), aims at providing more long term credit – up to three-five years for countries that meet strict qualification criteria. Once a credit line has been approved, a country can draw on it without having to meet specified policy goals, as is normally the case for IMF loans. The purpose of the FCL is to improve liquidity and prevent emergencies, and not just alleviate when emergencies hit as has been the main purpose of the traditional stand-by facility.
