January 2019 Vol.10 Ed.1
The 100th issue
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Untitled-1.indd 1 13/09/2018 10:32 Contents 100 January 2019. Vol.10 Ed.1 8 4 ABOUT OMFIF In conversation 5 LEADER 24 JOHN (IANNIS) MOURMOURAS with Danae Kyriakopoulou 6 REVIEW / AGENDA
Cover: The Bulletin at 100 Money matters 6 26 BELOW TREND GROWTH FORECAST FOR 2019 9 PREPARING FOR A NEW ERA Juan Castañeda and Tim Congdon David Marsh
10 FED LESSONS FROM ZERO LOWER BOUND Worldview James Bullard 28 STEERING CAPITAL TOWARDS GREEN FINANCE 11 SCRUTINY OF CENTRAL BANKS LIKELY TO INCREASE Joaquim Levy Daniel Mminele 29 RENMINBI’S GLOBAL RESERVE 12 AN EXERCISE IN JUDGEMENT AND INNOVATION SHARE RISING Mario Marcel Gary Smith 13 ADDRESSING REVERSAL OF FINANCIAL INTEGRATION 30 FED’S POWELL EQUIVOCATES Yannis Stournaras ON RATE RISES 14 WHY WE MUST COMPLETE BANKING UNION Darrell Delamaide Carlos da Silva Costa 31 INSURANCE: AN ANSWER TO FISCAL RISK 15 COPING WITH CHALLENGES OF COMPLEXITY Marcelo Giugale 30 Nestor Espenilla 32 SINGAPORE MODEL FOR AFRICA SOVEREIGN FUNDS Kelvin Tan 16 BUILDING NEXT-GENERATION CUSTODY SERVICES Hani Kablawi 34 NEW ARCHITECTURE OF PAYMENTS SYSTEMS John Velissarios and Ousmène Mandeng 17 PAST, PRESENT AND FUTURE OF CENTRAL BANKING Turalay Kenç 35 CENTRAL BANK GOLD BUYING SOARS Shaokai Fan 18 GREEN MARKET PASSING MILESTONES Frank Scheidig 37 IMPACT INVESTMENT SECTOR AT CRITICAL STAGE 19 LOOKING PAST TRADITIONAL Andy Budden MARKET INDICATORS Peter Zöllner 21 Inquiry 20 TOWARDS UNITED FRONT IN 38 CHART OF THE MONTH: CHINA REDUCES REQUIRED IMPACT INVESTING RESERVES OF MAJOR BANKS TO 11-YEAR LOW Karin Finkelston 38 EURO ENTERS DECISIVE DECADE Danae Kyriakopoulou 2019 Predictions 42 OMFIF ADVISERS NETWORK POLL 21 AN EYE ON THE HORIZON US trade war still likely to deepen, despite truce
OMFIF.ORG JANUARY 2019 BULLETIN 3
BTN_01.19_003_Contents TC.indd 3 10/01/2019 13:48 About OMFIF
Dialogue on world finance and economic policy
THE Offi cial Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a non-lobbying network for best practice in worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks, sovereign funds and public pension funds – with investable assets of $36tn, equivalent to 45% of world GDP. Promoting gender With offi ces in London and Singapore, OMFIF focuses on global policy and investment themes – particularly in asset management, capital markets and fi nancial supervision/regulation – relating to balance in public- central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher private fi nance standards, performance-enhancing public-private sector exchanges and a better understanding of the world economy, in an atmosphere of mutual trust. Gender Balance Index 2019 launch Membership Membership offers insight through two complementary channels – Analysis The presence of women at the top of and Meetings – where members play a prominent role in shaping the traditionally male-dominated public agenda. For more information about OMFIF membership, advertising or and private fi nancial institutions is subscriptions contact membership@omfi f.org benefi cial for both the organisations themselves and the global economy. Boards and executive teams benefi t from the diversity of opinion offered Analysis by gender equality. OMFIF Analysis includes commentaries, charts, reports, summaries of OMFIF is contributing to these trends meetings and The Bulletin. Contributors include in-house experts, advisers by launching the sixth annual Gender network members and representatives of member institutions and academic Balance Index. and offi cial bodies. To submit an article for consideration contact the editorial team at analysis@omfi f.org The launch includes a keynote presentation and panel discussion focusing on public sector initiatives and draws in private sector Meetings experience. OMFIF Meetings take place within central banks and other offi cial Venue: Embassy of Switzerland, institutions and are held under OMFIF Rules. A full list of past and London Date: 7 March 2019 forthcoming meetings is available on www.omfi f.org/meetings. For more information contact meetings@omfi f.org For more information or to register your interest, please visit omfi f.org/meetings OMFIF Advisers Network Sponsored by: The 173-strong OMFIF advisers network, chaired by Meghnad Desai, is made up of experts from around the world representing a range of sectors: monetary policy; political economy; capital markets; and industry and investment. They support the work of OMFIF in a variety of ways, including contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation.
OMFIF.ORG
BTN_01.19_004-005_About_Leader.indd 4 10/01/2019 16:48 Leader
Bankers who fell to earth Offi cial Monetary and Financial Institutions Forum 30 Crown Place, London, EC2A 4EB United Kingdom MFIF was born on a wave of refl ection that the good times couldn’t T: +44 (0)20 3008 5262 F: +44 (0)20 7965 4489 possibly last – because they only recently had come to an end. January www.omfi f.org @OMFIF O 2010, the date of the fi rst of what has now become 100 monthly Bulletins, marked the onset of a long, halting recovery from the fi nancial BOARD David Marsh, Chairman crisis. The world gingerly edged forward, knowing that at each Phil Middleton, Deputy Chairman step it could fall down again. Jai Arya Central banks have become more visible and more Pooma Kimis Edward Longhurst-Pierce vulnerable. The 100th edition recognises the bittersweet John Plender realities of modern central banking. Summing up a view Lauren Roberts in both developed and emerging market economies, Peter Wilkin Daniel Mminele of the South African Reserve Bank ADVISORY COUNCIL 100 writes, ‘Given their expanded role and growing demands Meghnad Desai, Chairman from society, central banks can expect to face more Mark Sobel, US Chairman scrutiny and, in some circumstances, challenges to their Johannes Witteveen, Honorary Chairman Louis de Montpellier, Deputy Chairman independence.’ This matches the fi ndings of a series of OMFIF Frank Scheidig, Deputy Chairman seminars and research pieces over the years; the second decade of the 21st Xiang Songzuo, Deputy Chairman century was the time when central bankers fell to earth. Hani Kablawi, Deputy Chairman Gary Smith, Deputy Chairman Jim Bullard of the St. Louis Federal Reserve writes on the Sisyphean quest Otaviano Canuto, Aslihan Gedik, to restore interest rates to ‘normal’ levels. Two central bankers bearing Robert Johnson,William Keegan, scars from the euro crisis – Yannis Stournaras from Greece and Carlos da John Kornblum, Norman Lamont, Silva Costa from Portugal – dwell on the incomplete business of shoring Kingsley Moghalu, Fabrizio Saccomanni, Niels Thygesen, Ted Truman, up Europe’s single currency. Nestor Espenilla from the Philippines, Mario Marsha Vande Berg, Ben Shenglin, Chair, Marcel from Chile and Turalay Kenç from Turkey summarise lengthy OMFIF Economists Network legacies of upheaval. EDITORIAL TEAM All our long-running themes are covered. We have articles on pensions Danae Kyriakopoulou, Head of Research from Andy Budden of Capital Group, on the rise of the renminbi from Gary Simon Hadley, Head of Production Julian Frazer, Senior Editor Smith of Barings, on sustainable Julie Levy-Abegnoli, Subeditor economics from Joaquim Levy, formerly Bhavin Patel, Economist of the World Bank, on central banks’ Kat Usita, Economist William Coningsby-Brown, Assistant gold-buying from Shaokai Fan of the Production Editor World Gold Council. Karin Finkelston of Darrell Delamaide, US Editor the International Finance Corporation MARKETING writes on impact investing, Hani Chris Ostrowski, Head, Business Development Kablawi of BNY Mellon on custody Stefan Berci, Communications Manager James Fitzgerald, Senior Marketing Executive services, the World Bank’s Marcelo Giugale on insuring emerging market Strictly no photocopying is permitted. It is illegal to economies, and Frank Scheidig of DZ reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this BANK on green bonds. For the 100th publication without the prior consent of the publisher. While every care is taken to provide accurate information, edition we have put on a display of the publisher cannot accept liability for any errors or economics pyrotechnics. Under the omissions. No responsibility will be accepted for any loss occurred by any individual acting or not acting as a result new quarterly format, the next Bulletin #1 of any content in this publication. On any specific matter January 2010 reference should be made to an appropriate adviser. appears in April. We’re sure it will be worth the wait. Company Number: 7032533. ISSN: 2398-4236
OMFIF.ORG JANUARY 2019 BULLETIN 5
BTN_01.19_004-005_About_Leader.indd 5 10/01/2019 16:48 Review
»12 November, Singapore Demystifying digital currencies in 2018 114 Meetings
AS PART of the 201 FinTech Festival in Singapore, OMFIF, in collaboration with the Sim Kee Boon Institute for Financial Economics at Singapore Management niversity, held a high level panel discussion on initial coin offerings, tokens and digital currencies. Speakers included Serey Chea, director general of central banking at the National Bank of Cambodia, Artur Granicki, Cities director of the Polish Financial Supervision Authority, and Antony Lewis, 21 director of research, cash and central bank digital currency strategy at R3.
Spencer joins »28 November, London advisory board World real interest
GRANT SPENCER, former governor of the rate ‘declining’ Reserve Bank of New Zealand, has joined the OMFIF advisory board. He retires from the THE TREND in the world real interest rate has Reserve Bank after lowered by around two percentage points over a 40-year career the past 30-40 years, according to Domenico in high-level Giannone, assistant vice-president at the banking, with Federal Reserve Bank of New York, who roles that included presented his fi ndings on global trends head of strategy in interest rates at an OMFIF meeting and business in London. Topics for debate included development ANZ infl ation targeting in the S, reserves Bank and special management and the unwinding of central adviser to the bank balance sheets since quantitative International easing. Presentation of Giannone’s fi ndings can Monetary Fund. be found at omfi f.org meetings.
6 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_006-007_Review.indd 6 11/01/2019 09:51 Agenda
»20 November, New York Effects of the S mid term
elections on economic policy »Thursday 24 January, New York
OMFIF HELD a discussion with Mark Sobel, Assessing global fi nancial its S chairman. e is a former deputy assistant stability secretary for International Monetary and Financial Policy at the S Treasury and until early 201 Tobias Adrian, director of the IMF’s monetary and capital markets department, outlines current and was S representative at the International potential risks covered in an IMF global fi nancial Monetary Fund. The discussion focused on stability report that investigates whether we are any how the results of the S midterm elections safer years after the fi nancial crisis. impacted the administration’s economic strategy, including fi scal policy, trade, infrastructure and relations with China. »Thursday 31 January, London Outlook for reserve asset management for 2019 A seminar on the outlook for public sector investment management in Europe for 2019, along with economic and fi nancial developments in . It brings together economic experts and asset managers from a public sector background.
»Thursday 7 March, London Launch of the Gender
»10 December, London Balance Index Launch of OMFIF’s sixth annual Gender Balance Index, which tracks the presence of men and women in Balancing the roles of senior positions at central banks and sovereign funds. The launch includes a panel discussion on the role of the ECB women in global public investment institutions. OMFIF DISC SSED the future of European banking with Ignazio »Monday 25 March, London Angeloni, member of the supervisory board of the European Central Developments in the US Bank. The meeting focused on economy how the ECB balances its roles of monitoring the euro area’s banking A City Lecture with Patrick Harker, president of the Federal Reserve Bank of Philadelphia and member sector while stimulating banks to of the Federal Open Market ommittee. The lecture lend more. Topics also included covers macroeconomic developments in the US and the reduction of the level of non- the Fed s monetary policy outlook. performing loans, improvements in banks’ balance sheets and unwinding unconventional monetary policy. For details visit omfif.org/meetings
OMFIF.ORG JANUARY 2019 BULLETIN 7
BTN_01.19_006-007_Review.indd 7 11/01/2019 09:51 Cover story: Bulletin at 100 The Bulletin at 100: Preparing for a new era
David Marsh as it became known in July August 2014 has greatly OMFIF developed. January 2011 saw a special issue on ‘The crisis of the euro’, featuring Michael Butler, a principal promoter of Britain’s ill fated 1 0 ‘hard euro’, advocating a parallel currency for the euro area. We he declared aim of the OMFIF Bulletin, set out in have run editions on China, Japan, North America, Tthe fi rst editorial in January 2010, was ‘to promote Latin America. We have focused on former Fed Chair a dialogue on issues of particular interest for central Janet Yellen, Nigerian President Muhammedu Buhari, banks and sovereign funds, and the community that Japanese Prime Minister Shin o Abe, iaochuan follows them within the fi nancial markets and beyond.’ hou, then governor of the People’s Bank of China, Over 100 issues, with 11 editions a year, we have and Mauricio Macri, president of Argentina. We have lived up to that pledge, extending range, detail and adapted editions to OMFIF meetings taking place in authorship, providing coverage in sectors ranging from individual countries or at specifi c fora. We marked green fi nance to digital currencies, including countries the 0th edition and the fi rst Main Meeting in the S from Norway to New ealand, from Bra il to Burundi. with features on S energy. We devoted the July 201 The fi rst issue presaged many future preoccupations. edition to green fi nance, coinciding with an OMFIF There were articles on S congressional attacks on the symposium at the Bundesbank. Africa was the theme Federal Reserve, threats to central bank independence in September 201 and January 2014, while Asia was John Nug e wrote ‘Central banks are now no longer showcased in October 201 when we launched two beyond the reach of politics’ , reserve currency large reports at the International Monetary Fund diversifi cation and the renminbi. We carried an World Bank meetings in Bali. over optimistic headline, ‘Arab monetary union plan We have made The Bulletin more digital, fl exible, inches closer’, over a piece claiming that the ‘mirage’ colourful and pictorial, particularly under layouts of Gulf monetary unity was becoming more distinct. devised since 201 by Simon adley and Will Meghnad Desai called for a strengthened gold role in Coningsby Brown. We have devised a longer term world money. Paul olcker explained why he wished schedule, aligning the publication with issues that to separate ‘commercial banking activities essential OMFIF is highlighting over years rather than months: to the functioning of our fi nancial system from more Danae Kyriakopoulou and Julian Fra er have played speculative trading oriented capital markets activities a big role in this. We have made The Bulletin home that are not.’ arold James argued that fi nancial to an ever expanding range of authors. We have ‘Balkanisation’ was impeding Europe’s monetary greatly increased regular features ranging from the union requiring continent wide banking supervision Monthly Review to the Advisers’ Poll. Mercifully, and regulation. we have eschewed the dreaded phrase, ‘thought Since the fi rst issue listing only 1 advisory board leadership’. All this prepares us for a new century plus members including stalwarts Darrell Delamaide, era, when OMFIF will publish The Bulletin quarterly, Oscar Lewisohn, Paola Subacchi, Niels Thygesen, emphasising the longer term edge to our work. Makoto tsumi and Ernst Welteke The Bulletin David Marsh is Chairman of OMFIF.
8 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_008-009_coverOpener_David.indd 8 11/01/2019 09:52 100
OMFIF.ORG JANUARY 2019 BULLETIN 9
BTN_01.19_008-009_coverOpener_David.indd 9 11/01/2019 09:52 Bulletin at 100
Fed lessons from zero lower bound Next fi nancial crisis may come from outside banking sector
James Bullard We’ve lived through the Great Europe even seeing negative on unconventional monetary Federal Reserve Recession, an era of near ero interest rates. The idea that policy, the focus today is on Bank of St. Louis interest rates, fears that the S this would last for so long far ‘getting back to normal’ that is, would fall into a defl ationary trap beyond ordinary business cycle increasing the Fed’s policy rate in it didn’t and implementation time was a shock to the global line with better economic of unprecedented policies aimed macroeconomic and central conditions and reducing the decade ago, I took on at stopping an ever deepening banking communities. si e of the Fed’s balance sheet, Athe position of president crisis. Through it all, we learned The 200 0 crisis made which had grown under the and chief executive offi cer of some important lessons. people reconsider the quantitative easing programmes. the Federal Reserve Bank of This period underscored how intersection between the Given the uncertainty about what St. Louis one of 12 regional challenging it is to encounter the fi nancial sector and real ‘normal’ is, each of us reserve banks that, together ero lower bound for the Fed’s economy. We have learned to on the Federal Open Market with the board of governors policy rate. It turned out to be a be more keenly attuned to the Committee brings his or her own in Washington, make up the more diffi cult issue than many of fact that fi nancial crises can views on what the appropriate S Federal Reserve System. us appreciated. I had thought it happen and that the modern policy rate path might be. That was 1 April 200 , and was an issue of the 1 30s Great economy is not protected against That diversity of thought and it wasn’t the time for ovial Depression era, but ultimately these shocks. While such crises discourse ultimately yields the congratulations. The S was in the fi nancial crisis changed how are infrequent, they can be best outcome. the throes of a fi nancial crisis, we think about central banking devastating to the economy as a We may not know with the mortgage crisis was already and how a central bank should whole when they do occur. certainty what the future will brewing, and ma or banks were conduct monetary policy at the hold, but being at the forefront of failing. The Federal Reserve ero lower bound. Getting back to normal the ongoing, rigorous debate of was cutting the target for the Moreover, we experienced As any monetary policy maker optimal monetary policy is federal funds rate and debating ultralow policy rates globally would be, I’m focused on where critical. We shouldn’t shy away unconventional stimulus for much longer than anyone we’re going in the years ahead, from discussing new approaches measures. anticipated. Previously, it would where the debate on monetary to control infl ation, debunking These past 10 years have have been surprising to stay at policy will lead us and what the old myths about how the been anything but ordinary. the ero lower bound for more right policy decisions will be in a economy works or discarding than two quarters, much less new era. out of date macroeconomic a year. Yet the S remained In my view, there is not enough theories in favour of new
May 2016 at a near ero policy rate for discussion about where the next narratives with better explanatory Vol. 7 Ed. 5 The Bulletin seven years with Japan and fi nancial crisis may originate. power of the regimes in which we Official monetary and financial institutions ▪ Asset management ▪ Global money and credit It has the potential to come fi nd ourselves. Fed and the election from outside the traditional It’s an exciting time to be Elusive American dream banking sector, as the 200 0 studying this dynamic global Efraim Chalamish on China investment in US ‘We shouldn’t Richard Koo on European self-financing John Mourmouras on negative interest rates crisis arguably did. As a central economy of the 21st century, the Michael Stürmer on the geopolitics of oil shy away from Marsha Vande Berg on stagnating wages discussing new bank, we have an opportunity factors affecting it and what lies to reorient our thinking about ahead. approaches to risks to ensure we set the right James Bullard is President and control infl ation or policy and employ the right level C ief e utive ffi er of t e # 1 discarding out of of oversight to help mitigate or Federal Reserve Bank of St. May 2016 date macroeconomic prevent the potential impacts of Louis. This article was adapted theories.’ future crises. from the St. Louis Fed’s annual If the last decade was focused report.
10 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_010_Bullard.indd 10 10/01/2019 16:33 Scrutiny of central banks likely to increase Greater transparency and accountability to match expanded responsibilities
Daniel lacklustre. Many have argued infl ation, deemed necessary to Institutions must continue to Mminele that successive rounds of QE only create an environment conducive improve the resilience of the South African encouraged risk taking in the to sustainable economic growth. global fi nancial system and guard Reserve Bank fi nancial economy rather than While the future primary role against the erosion of hard-won in the real economy. There does, of central banks and monetary international regulatory reforms however, seem to be consensus policy will remain medium-term while closely monitoring for any few months ago, we marked that QE played a crucial role in price stability, lessons from 2008 unintended consequences and Athe 10-year anniversary of containing the crisis, and that clearly point to the need to give adopting corrective measures. the collapse of Lehman Brothers central banks had little choice broader fi nancial stability more And as ever, appropriate and the start of a grave period for as ‘other policy-makers were prominence. governance and conduct fi nancial markets. For policy paralysed by dysfunctional The rationale for the increased standards must be enforced to makers, the past decade was politics’, as Mohamed El Erian focus on fi nancial stability is strengthen the integrity and characterised by strategies to says in his book The Only Game in informed by the increasing reputation of fi nancial markets deal with the aftermath of the Town: Central Banks, Instability, interdependence of economies, and participants. 200 fi nancial crisis through a and Avoiding the Next Collapse. the interconnectedness in the Given their expanded role and combination of ‘fi refi ghting’ and In Africa, QE produced mixed global fi nancial system, and the growing demands from society, trying to correct the defects that results. The initial strong infl ows systemic nature of risks brought central banks can expect to created the crisis. of capital as part of search-for- about by this kind of integration. face more scrutiny than was Major central banks found yield strategies and favourable Policy-makers will continue to historically the case and, in themselves in unfamiliar fi nancial conditions allowed many grapple with how best to manage some circumstances, challenges territory. They relied increasingly sub-Saharan African countries to the relationship between price to their independence. This on unconventional policies, fi nance their defi cits more easily, and fi nancial stability as well will require higher degrees of the most prominent being leading to a surge in eurodollar as macro- and microprudential transparency to facilitate holding quantitative easing, to boost issuances. But the great exit is policies. them accountable in view of their infl ation, support growth and proving to be a challenge for expanded responsibilities. reduce unemployment. Many many of these countries and those Transparency and integrity Daniel Mminele is Deputy commentators warned at the time non fi nancial corporates that It is said that ‘prediction is very Governor of the South African that the longer central bankers relied too heavily on a cash fl ush diffi cult, especially if it is about Reserve Bank. went down that route, the more system and cheap valuations to the future.’ The next decade is complex the exit would be. increase their leverage but paid likely to see a rate of change not Some countries are still too little attention to structural witnessed before, which will # implementing QE, while others reform and improving their require fi nancial markets and January 2014 are withdrawing such measures. economic and fi nancial resilience. policy making to be agile. The As this ‘great exit’ unfolds and Now they are fi nding it harder and opportunities and threats in central banks pursue monetary more costly to meet their external the wake of rapid technological policy normalisation and look fi nancial obligations. advancement will become more to shrink their balance sheets, Another key feature of the diffi cult to distinguish. debates continue to rage about fi nancial market and policy One key theme that will shape the success, or otherwise, of these making landscape since 2010 the next decade will be the rise unorthodox policies. has been the changing role of of fi nancial technology. This While the global economy central banks. Leading up to the will demand a careful balance emerged from recession in the fi nancial crisis, central banks between not stifl ing innovation fourth quarter of 2009, the focused primarily on achieving while ensuring the safety and pace of growth since has been and maintaining low and stable resilience of fi nancial systems.
OMFIF.ORG JANUARY 2019 BULLETIN 11
BTN_01.19_011_Mminele.indd 11 10/01/2019 15:09 Bulletin at 100
An exercise in judgement and innovation Pioneering monetary policy development in the emerging world
Mario Marcel ability to cushion them If inflation fails to respond to by growing administrative Banco Central through the exchange rate and monetary impulses as predicted datasets and ‘big data’. One de Chile countercyclical policy responses by models, financial imbalances should never forget that data has improved significantly. may build up, fiscal discipline are only one instrument helping As a result, Chile’s monetary may erode and inflation risks to capture economic behaviour. policy framework has proved may be underpriced by markets. From a policy-making fter decades of high useful when facing subsequent This could expose them to perspective, data collection, Ainflation, inflation challenges, including the 2008 reversals with data surprises processing and statistical targeting frameworks have financial crisis, the end of the going forward, transforming methods are a way to produce proved their effectiveness in commodity price boom in 2013- policy-making into a much more evidence for better decision- many emerging economies. 14, and in resisting pressures complex undertaking. making. This has been key in to tighten the monetary policy It has become more difficult Any central bank that controlling price dynamics response to transitory pressures to measure movements of operates in a forward-looking and anchoring expectations from short-term currency prices, as standardised goods environment, dealing with many to target, delivering lower depreciations. account for a smaller share unobservable concepts, has the price and output volatility. In each of the high-volatility of household consumption ultimate responsibility for using Some countries have adopted episodes faced after the compared to services and fast- all the relevant information fully-fledged forward-looking crisis, anchored inflation changing goods. at hand and sharing such inflation targeting regimes expectations, automatic fiscal The advent of the digital information with the public to together with floating exchange stabilisers, foreign exchange economy also poses a major ensure that decisions are easily rates, helping them navigate a hedging and a sound financial challenge to correctly understood. Monetary policy- more turbulent global economy. system have contributed to measuring the value added making is not a bureaucratic This has been complemented provide monetary policy with throughout the wide range procedure, but a powerful with major improvements in sufficient room for manoeuvre. of complex and globalised exercise in judgement. communication, transparency But these factors are not economic activities. Structural Mario Marcel is Governor and accountability. exogenous to macroeconomic changes especially relevant of the Banco Chile pioneered monetary policy. They were nurtured by for emerging countries, like Central de policy innovation in the a consistent policy framework demographic transitions or Chile. emerging world. Banco built and maintained over the lengthened international value # Central de Chile was granted last 20 years. chains, should also encourage January 2017 independence and a price central banks to develop
January 2017 stability mandate nearly 30 Ultimate responsibility appropriate tools to formulate The Bulletin Vol. 8 Ed. 1 years ago and exercised it Inflation dynamics and the way and communicate policy paths Growth, risk, vulnerability swiftly, supported by an early they interact with economic that make forward-looking World shocks and emerging markets version of inflation targets variables are a central challenge inflation targeting work. in the early 1990s. Over time, for policy-makers who have As the economy evolves, the as the financial market has price stability as their core relevance of these tools must deepened the development mandate. We have observed be kept constantly in check. of exchange rate hedging persistently a puzzling The quantity and quality of mechanisms, the central bank behaviour of inflation in many data available to make policy
FOCUS on advisory board 2017 forecasts has overcome fears of floating. developed countries, where decisions may also change Etsuro Honda on Abenomics challenges John Mourmouras on central bank independence Mthuli Ncube on African digital financial services As an open economy, Chile standard approaches have done substantially. Vicky Pryce and Danae Kyriakopoulou on Greek debt Edoardo Reviglio and Marcello Minenna on Italian banks is not immune to external a poor job of predicting price The dominance of regular shocks, but the country’s pressures. economic surveys is challenged
12 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_012_Marcel.indd 12 11/01/2019 09:55 ressing reversa of fi nan ia integration Delay in ad ustments only magnifi es Europe problem
Yannis Stabilisation Function. The risk sharing in the E . In this programme as well as ownership Stournaras new E budgetary tools aim to context, the role of the ESM could mainly by the government but Bank of Greece bolster stability in times of stress be enhanced to support banking also the main opposition parties through investment continuity union with a backstop facility. is key to the ad ustment’s success. and providing incentives for EM should enhance public Third, political solidarity and domestic structural reforms. sector risk sharing by creating greater risk sharing in the euro uch has been done in Nonetheless, the architecture a centralised fi scal stabilisation area to address large asymmetric Mrecent years following of EM is still, in many respects, tool. The Commission’s proposed shocks are of ma or importance. the Greek debt crisis to improve incomplete. Euro area policy European investment stabilisation Pointing fi ngers at countries the functioning of European makers cannot rely solely on ECB function could fi ll this role. Other in diffi culty only propagates economic and monetary union. interventions. It is essential to suggestions involve a European populist voices on all sides. Key initiatives included the ensure that the Commission’s unemployment insurance scheme Fourth, private and public risk provision of intergovernmental macroeconomic imbalances and the issuance of European sharing should be enhanced by loans to Greece, establishment of procedure operates more ‘safe’ bonds. These ideas deserve moving forward with the banking the European Financial Stability symmetrically both for member policy makers’ attention. and capital markets unions and Facility and its successor, the states with external defi cits and With regard to member states, by creating a centralised fi scal European Stability Mechanism for those with external surpluses. national ownership and credible stabilisation tool. To avoid and the creation of the still To date the burden of ad ustment implementation of country moral ha ard, risk sharing incomplete banking union. has fallen, to a large degree, specifi c recommendations is should go together with risk There has been, too, the on member states with current crucial for promoting economic reduction and close economic application of stricter rules account and budget defi cits, such policy coordination and risk policy coordination. Moreover, on banking regulation and as Greece on the eve of the crisis reduction. National policies countries need to improve income supervision, the establishment member states with high current should focus on structural convergence and ensure that of the European Systemic Risk account surpluses could have reforms to improve the fl exibility economic rebalancing operates Board and the development of responded more appropriately. of domestic markets and reduce symmetrically. appropriate macroprudential Since the crisis, policy makers vulnerabilities in the fi nancial Last but not least, a fi nal point instruments to identify and have observed a home bias in sector. This should facilitate the on Greece to bolster investors’ address system wide risks. The investment and a fl ow of euro ad ustment of these economies confi dence in the prospects European Central Bank developed area excess savings towards the to future shocks. They should of the Greek economy and to new monetary policy instruments rest of the world rather than also implement sound pro be able to refi nance maturing to deal with low infl ation within the E . This has led growth fi scal policies that debt on sustainable terms, the and growth, and the Single to a reversal of the previously allow for stabilisation over the government must continue to Supervisory Mechanism assumed achieved fi nancial integration and business cycle and ensure debt implement reforms and avoid responsibility for all systemic income convergence among euro sustainability. reneging on programme related banks in the European nion, area countries. commitments. thus addressing the home bias The priority, in these So i arity in urope The years since the debt issue in supervision. circumstances, must be to Policy makers can draw several crisis have been tremendously More recently the European complete the banking union with key policy messages from the diffi cult for the euro area, but Commission, in view of the a European deposit insurance Greek crisis. First, delaying the European pro ect endures. Multiannual Financial Framework scheme, as well as the capital necessary ad ustments only The fi rming up of EM must be for the period 2021 202 , markets union. This will restore magnifi es the problem, which will policy makers’ priority in the tabled proposals to establish intra European fi nancial fl ows, then have to be addressed later on years to come. a Reform Support Programme improve stability in the banking less favourable terms. Second, the annis Stournaras is overnor and a European Investment sector and promote private proper sequencing of the reform of t e an of ree e.
OMFIF.ORG JANUARY 2019 BULLETIN 13
BTN_01.19_013_Stournaras.indd 13 10/01/2019 14:11 Bulletin at 100
Why we must complete banking union Financial stability threats would hit citizens’ trust
Carlos da provision of liquidity in bank opportunity to reflect on the compliance with the principle Silva Costa resolution – which jeopardises many achievements of Europe’s of central responsibility for Banco de its fundamental benefits. crisis management set-up and financial stability. In this Portugal As we progressed along the draw some preliminary lessons context, it is necessary to find road, new and bigger hurdles from the current (incomplete) ways to ensure and safeguard emerged. Policy-makers focused architecture. this basic principle within ollowing the 2008 crisis, excessively on ‘risk reduction banking union. It is also essential Freforms were needed in v. risk sharing’ and lost Looking ahead to determine which coordination Europe’s financial sector. The sight of the banking union’s With the benefit of hindsight, and convergence mechanisms establishment of the single overall objectives. we should reflect on the need to between territorial regulatory rulebook and the launch of the strengthen the SSM’s decision- and supervisory authorities European Union’s banking union Incomplete setup making process, the need to draw can be established between with its rules and institutions In this incomplete setup, banks a line clearly between regulatory the banking union and the constitute a commendable are ‘European in life but national powers and supervisory oversight, remaining EU member states. success in this regard. in death’. Supervisory and and ensuring the application One should not underestimate The banking union is currently resolution decisions are mostly of the principle of EU ‘financial how much has been achieved in based on two pillars: the Single taken at the European level, stability responsibility, regulatory recent years. Nevertheless, the Supervisory Mechanism and but the ensuing consequences responsibility and supervisory foundations of Europe’s financial Single Resolution Mechanism. still lie with taxpayers at the responsibility’. architecture are still not However, since these were put national level. This may have a Strengthening the decision- sufficiently robust to withstand in place, the political will to potentially serious impact on making process of the SSM the impact of a future crisis. This complete the banking union national budgets, as the ultimate would ensure shared ownership should be a priority for policy- has waned. guarantor of financial stability of problems and decisions, makers and relevant institutions. The banking union is missing remains national. encouraging a broader vision on Decisive political will to move critical elements – a fully-fledged In view of the mismatch the implications of the SSM’s forward with the completion of European deposit insurance between European oversight and decisions on financial stability. the banking union is required. In scheme, a backstop to the national liability, the different This could be achieved through the absence of this will, Europe Single Resolution Fund and the stakeholders’ objectives and the establishment of intermediate must revisit its existing rules interests are unaligned. committees similar to those of the to safeguard financial stability. It is important to consider who ECB’s monetary policy function. This is in the best interests of its
MAASTRICHT OMFIF EDITION is actually looking after The separation of supervisory people as few things can be more OMFIF BULLETIN 7.2.12 GlobalOfficial MonetaryInsight on and Official Monetary and Financial Institutions Financial Institutions Forum February 2012 financial stability. functions from regulatory ones destructive to citizens’ trust Europe’s hopeless capitalism Two-tier monetary union might be the answer Four years after the SSM is necessary for the political in European institutions than Meghnad Desai, Chairman, Advisory Board
rom summit to summit, the euro area of fiscal authority inside their states. may then rescue Portugal and Spain Fcrisis stumbles on. The talk may be Yet they are still saddled with fiscal as well from the shackles of the euro became operational, much has legitimation of regulatory threats to financial stability. of growth but the pact is about zero responsibility. area; and maybe Ireland could simply deficits. Despite all the talk of creating get lucky. jobs for the young, the euro area offers It’s not difficult to work out how they its people hopeless capitalism for the may react. There is every incentive It defies imagination that, when so foreseeable future. Each country is for the weaker countries to break the much economics has been taught in our been accomplished. Danièle standards. The overlap of Carlos da Silva Costa is left on its own to achieve a balanced pact. Greece could seek to do better schools and universities, budget deficits budget. All the help they are promised by leaving the euro, reneging on all its are not defined properly in cyclically- is a Gauleiter from outside. debts, and taking the hit of not being adjusted terms or confined to structural able to borrow for some years. deficits. There is no attempt to plot a The weaker brethren in the South get feasible path for deficits down from the Nouy, the former chair of the regulatory and supervisory Governor of the Banco de 20 years of austerity as the prize for In return it would depreciate its high level now to zero in a credible staying in the single currency. They face currency and recover within five years. fashion. The contradictions stretch to an unsavoury combination of hectoring That would better than the hopeless Christine Lagarde, the IMF managing from the outside, and deprivation prospect currently on offer. Contagion director. (continued on page 4 ...) Supervisory Board (2014-18), territories guarantees Portugal. OMFIF commemorates 20th anniversary of Maastricht signing with Schröder dinner The 20th anniversary of the signing of the Maastricht treaty on 7 February 1992 is being commemorated with a dinner in London where the principal guest is Gerhard Schröder, the former German chancellor who was in office when the single currency was introduced in 1999. Also featuring in the February must be praised for her decisive 2012 Bulletin are the views of three protagonists at the Maastricht summit, Norman Lamont, Ruud # Lubbers and Wim Kok. SEE MAASTRICHT TTREATREATY 20 YEARS ON, P.6,7,23. February 2012 Contents Hungarian hubris contribution to this success. Good emerging markets outlookPeter Eerdmans 3 IMF victory sends waves ‘One should not underestimate how much has Why dollar will firm Michael Kaimakliotis 5 The memory of Maastricht Roel Janssen 6 A special correspondent Europe is bigger than the euro Norman Lamont 7 Her perseverance was essential he trial of strength between Hungary and the international The elusiveness of money Erik Holm 8 Tfinancial community over the status of the National Bank In defence of seriousness David Marsh 10 of Hungary has ended in a landmark victory for the forces of been achieved in recent years. Nevertheless, the central bank independence, sending an important signal around Archive Insight: Franco-German tension in the air 13 the world. Hungary’s climb-down from hubris demonstrates to establish the mechanism’s Transparency raises new questions Darrell Delamaide 14 governments that require help from the International Monetary Fund and other official lenders have to conform to acceptable Italy and Spain making progress 16 standards of political and economic behaviour. Heading for Bernanke bubble Stefan Bielmeier 17 foundations of Europe’s fi nancial architecture OMFIF Advisory Board 18 Hungary’s maverick prime minister Viktor Orban has spent the credibility. New Year trying to win back trust from the IMF and European Vickers comes to Europe Michael Lafferty 20 Union after his ‘anti-austerity, anti-IMF’ policies threatened to Looking at separation Dirk Schoenmaker 21 cut off much-needed official funding. An encounter at Annabel's Frederick Hopson 22 Orban’s centre-right Fidesz party won power in 2010, gaining are still not suffi ciently robust to withstand the Pearls of wisdom on euro road 23 As Andrea Enria takes over two-thirds of parliamentary seats and rewriting the constitution Cameron's invented 'veto' victory William Keegan 24 in a way that the EU said infringed democratic freedoms and EU laws. (continued on page 4 ...) www.om f.org 1 Nouy’s mandate, now is a good impact of a future crisis.’
14 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_014_Costa.indd 14 10/01/2019 14:20 Coping with challenges of complexity Looking backward and forward to carve clear path for the future
Nestor has become increasingly on its legacy of excellence by consumer protection agenda to Espenilla interconnected. Such safeguarding price and fi nancial guarantee no one is left behind Bangko Sentral integration can facilitate greater stability with greater vigour. in terms of meaningful access to ng Pilipinas incorporation of information, It has responded to infl ation fi nancial services. The BSP has leading to more effi cient pricing pressures with proactive policy set its sights on leveraging the of assets. owever, it can also actions to help temper infl ation digitalisation of the fi nancial he start of a new year is a amplify the transmission of risks. The bank continues system as a primary platform for Tgood time for refl ection. negative shocks and lead to to fi ne tune its execution of its fi nancial inclusion agenda. It People have different approaches excess volatility across fi nancial monetary and fi nancial policies. is collaborating closely with the to introspection. Some look back markets. Third, complexity is It has implemented an interest banking industry to establish on the year that was, while others increasingly an economic and rate corridor system, which is a safe, reliable and affordable look forward to the possibilities fi nancial reality across the expected to aid development retail payment system through of the year ahead. I tend to refl ect world. Two powerful forces are of domestic capital markets the implementation of the by seeing both sides. driving this. One is the fourth by fostering active liquidity Philippines’ National Retail It is critical for decision industrial revolution, which management by banks and Payment System. These measures makers to look back and use is transforming how people encouraging greater reliance should help provide everyone the lessons from the past to inform relate with one another. Take on the use of market friendly opportunity to reap the benefi ts policy actions. At the same time, for instance advances in digital instruments. of the country’s economic policies must be responsive and fi nance and fi ntech. While some growth. anticipate new challenges going solutions have great promise to Rethinking frameworks In responding to the emerging forward. unleash higher productivity and The bank has been rethinking challenges of our time we cannot The economic landscape effi ciency, the velocity at which its frameworks to consider afford to simply either look back has changed in the last 10 these innovations are evolving emerging trends and tipping or look forward. We must see years. First, the markets do could also be disruptive for points. The BSP has increased both sides if we are to carve a not always get it right. Before the banking system. Another its focus on inclusive growth and clear path into the future. the 200 fi nancial crisis, key factor is the prevalence of integrated fi nancial inclusion Nestor Espenilla is Governor policy makers accepted the political issues shaking up the into its organisational ob ectives. of the Bangko Sentral ng idea of an effi cient and rational policy environment. Income The bank is committed to Pilipinas. market. owever, as Andrew inequality, which has fuelled the advancing its fi nancial inclusion, Lo, director of the Laboratory rise of populist sentiment, has led fi nancial education, and for Financial Engineering at to a retreat from multilateralism. # the Massachusetts Institute This adds further uncertainty September 2017 of Technology, pointed out, and complicates the conduct of ‘Income inequality, the crisis revealed painfully policy. which has fuelled that sometimes the so the rise of populist called ‘wisdom of the crowd’ Looking forward can be overwhelmed by the All of these changes require sentiment, has led ‘madness of the mob’. Markets, policy makers to look forward to a retreat from left unfettered, could lead and anticipate emerging multilateralism. This to signifi cant asset price challenges. At the Bangko adds further uncertainty misalignments, which could Sentral ng Pilipinas BSP , and complicates the have destabilising effects on the this approach is enshrined economy. in the ‘Continuity Plus Plus’ conduct of policy.’ Second, the global economy agenda. The BSP is building
OMFIF.ORG JANUARY 2019 BULLETIN 15
BTN_01.19_015_Espenilla.indd 15 11/01/2019 09:56 Bulletin at 100
Building next-generation custody services Full upgrade required if sector is to stand the test of time
Hani Kablawi in the structure of the asset platforms with the data and making. A comprehensive BNY Mellon management industry and the applications of partners and approach to servicing clients products it offers. There is more third parties, custodians can around the world relies on the concentration, and index-based provide clients with deeper seamless supply of custody passive investment vehicles insights to result in operational enabled services, such as have come to the fore. With the effi ciency and strategic collateral management, transfer he fi rst 100 issues of The prospect of industry disruption advantage. The next generation agency and fund accounting. TBulletin have covered from fi nancial technology of custody services involves a fascinating period for the companies and internet giants, sending information through Addressing risks fi nancial services industry. The asset managers are working application programming It will take time to roll past decade has seen sweeping hard to offer the speed and interfaces and widgets for both out the next generation of regulatory reforms and higher personalisation their clients have core and non core custody custody services. Building an compliance burdens. Tougher come to expect in so many areas services. Moreover, as fi nancial infrastructure fi t for the next capital and leverage rules were of their digital lives. institutions seek to leverage new 10 years involves a signifi cant introduced. The sector grappled sources of data, custodians will investment in technology. with persistently low yields Full upgrade needed become aggregated data service But this is not simply about and margins. Technological Custody providers like BNY providers. improving client services. It is innovation led to new sources Mellon have evolved in response The third way in which also about ensuring the risks of competition. This was all to the demand from investors custody services will develop inherent in the global custody underpinned by an uncertain and investment managers for relates to asset classes. chain are addressed. These risks geopolitical and macroeconomic new services and capabilities. But Custodians play a critical role are not static as last year’s outlook. subtle changes may no longer be in ensuring that investors can paper from the International During this time, there have enough. The asset management access a broad range of assets Securities Services Association been signifi cant developments industry requires a full upgrade securely and cost effectively. points out, custody has become to the next generation of custody Investors ad ust their asset signifi cantly more complicated, services to remain relevant for mix to achieve higher returns, as fi nancial markets themselves the next 10 years. manage risks or comply with have developed in both size and # The next generation of regulations. In doing so they complexity. This trend is likely to October 2017 custody services will be deployed seek new, often less-standardised continue. in four ways. The fi rst is the assets, including new asset types To ensure a robust global provision of self-service tools such as cryptocurrencies. investment infrastructure, to allow investors to consume The fourth area of custodians must be able to information, intelligence and enhancement is global access. A develop a reliable, adaptable and insight when and how it suits fundamental role of custodians is sustainable platform to meet them. Investors require bespoke to supply infrastructure and local the changing demands of the tools that provide greater expertise to ensure clients can fi nancial services industry over visibility across the entire post access markets and operate on a the next decade. trade value chain on a timely and worldwide scale. Investors must Hani Kablawi is CEO Global responsive basis, along with the be prepared to shift their focus at Asset Servicing and Chairman ability to integrate those tools short notice. Custodians bridge of EMEA, BNY Mellon. The within their own systems. the gap between local and global, views expressed herein are The second is the enrichment and provide transparency within those of the author only and and aggregation of data. By an enterprise-wide structure may not re e t t e vie s of combining data on their own to support informed decision- BNY Mellon.
16 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_016_Kablawi.indd 16 10/01/2019 14:29 Past, present and future of central banking Autonomy critical to overcoming fi nancial repression and digital disruption
Turalay Kenç So what differentiates money defl ationary and infl ationary and surveillance. However, it is University of and banking from economics? outcomes. This involves safe to say that digitalisation Cambridge The answer is related to the averting fi nancial crises and will probably facilitate the magic of fi at money, the money designing corrective policies for emergence of a cashless society. multiplying alchemy of banking the negative consequences of Policy-makers will welcome this, and associated paradoxical crises. Hence, the lesson to draw as it will remove the zero-lower f the almost 400 years of developments. from the 200 fi nancial crisis is bound on negative interest rates Icentral banking history that fi nancial stability should and hence make monetary policy reveals anything, it is that the Power of optimism be central bankers’ guiding more effective in the aftermath functions of these institutions Whenever an optimistic view of principle. of fi nancial crises. are fl uid and will continue to the future starts to take hold of The alchemy of fractional evolve in the future. society, a credit boom facilitated Digital revolution reserve banking and systemic Even over the last 10 years, by easy money and credit The digital age, characterised risk associated with debt the state of central banking policies often unfolds. by artifi cial intelligence, fi nancing will continue to has changed signifi cantly. The The power of optimism distributed ledgers and big data, challenge central bankers as view of a Chinese central banker chiefl y determines the extent poses considerable challenges they look to implement an quoted by Mervyn King, the of the episode. The expanded to central banks. These optimal mix of interest rate former governor of the Bank of credit volume is likely to lower technological advances have policy and macroprudential England (2003-13), in his book fi nancial market volatility in the potential to change demand regulation. The End of Alchemy points the economy, leading to the for cash (and even central bank In addition, when a central out the real reason behind this so-called volatility paradox that money), credit intermediation, bank oversees both price and development. ‘low measured volatility is most fi nancial regulation and market fi nancial stability, monetary The Chinese policy maker said risky’. In such cases, the central volatility. policy may be abused to reduce to King in 2011, ‘We in China bank of the country either The emergence of anonymous the government sector’s real digital currencies such as debt burden following a fi scal bitcoin may lead to currency stimulus package. Such fi nancial substitution problems similar repression was observed in both ‘It is safe to say that digitalisation will probably to deposit and liability the US and UK following the facilitate the emergence of a cashless society. dollarisation in some developing second world war until the early Policy-makers will welcome this, as it will remove countries, where people prefer 1980s. the zero-lower bound on negative interest rates the currencies of foreign The emergence of private and hence make monetary policy more effective in countries with lower infl ation digital money and the need to and interest rates to domestic avoid fi nancial repressions mean the aftermath of fi nancial crises.’ money and credit as a unit of central bank independence is account, store of value and of paramount importance if denominator in liabilities. countries around the world are to have learned a good deal from does not have the mandate to Similarly, the rise of machine overcome economic disruption in the West about how competition intervene and hence prevent learning in fi nance may the years to come. and a market economy support a possible crisis, or simply heighten risk and uncertainty in Turalay Kenç is Pembroke industrialisation and create engages in crisis and aggregate fi nancial markets. Visiting Professor of Finance higher living standards… We demand management. It remains to be seen whether at the University of Cambridge want to emulate that… But I The goal of central banking is the digital revolution will have and former Deputy Governor don’t think you’ve quite got the to protect the purchasing power a positive or negative impact on of the Central Bank of the hang of money and banking yet.’ of fi at money by allaying both fi nancial regulation, supervision Republic of Turkey.
OMFIF.ORG JANUARY 2019 BULLETIN 17
BTN_01.19_017_Kenc.indd 17 11/01/2019 09:56 Bulletin at 100
Green market passing milestones Sustainable fi nance no longer ust a virtue, but an absolutely necessity
Frank wellbeing. It does not value Those fi nancing needs are addition to sustainable bonds, Scheidig other essentials like security too vast to go through a ‘central sustainable loans also have D BANK or environmental and social pot’. Public investment alone great potential for facilitating quality. People must realise is not nearly enough. The the transition to a sustainable that sustainable development sustainable funding gap can future. The relatively nascent and economic success are only be met by signifi cantly green loan market already en years ago, sustainable inseparably linked. increasing private sector passed a signifi cant milestone Tfi nance was in its infancy Countries need a new and participation with the help of when the Green Loan Principles, and specialised equity sustainable growth model with the capital markets. Investors a framework for green lending, investors were responsible for different pillars economic, are beginning to recognise this, were introduced by the Loan driving socially responsible environmental, social and and sustainable investing is on Market Association in March investments. With new governance. That is why, as the rise. 201 . issuances of around 00m in early as eight years ago, D Over the last 10 years, capital 200 , sustainable bonds were BANK developed a unique EESG ‘Green goes rainbow’ markets have followed the right a niche market. Around that analysis and rating methodology With an estimated volume of path to support the sustainable time, only a few sovereign and to facilitate sustainable stock more than 100tn, the global transformation of the world supranational institutions and bond picking. fi xed income market bears economy. But much is still to be were acting as pioneers. Building a sustainable huge potential for facilitating done. It is important to fi nd a These included the European economy cannot be achieved the transition to a sustainable common language in sustainable Investment Bank, which issued without the participation future. Sustainable bonds stand fi nance, and policy makers must its fi rst climate awareness bond of capital markets. Two out as one of the most promising make progress on international in 200 , or the World Bank, examples illustrate this. investment vehicles to support standards and defi nitions. which issued its fi rst green bond First, the Organisation for the transition towards a The arrival of the European in 200 . Economic Co operation and sustainable economy. Commission’s action plan on The world has changed in Development estimates global In 201 the green bond fi nancing sustainable growth the intervening years. There infrastructure requires .3tn market topped the 100bn arrived in March 201 was is a growing perception in per year in investment to be in mark. According to D BANK’s warmly welcomed in this regard. developed economies that the line with the ob ectives set in sustainable investment But legislators must not lose current economic model, which the 201 Paris climate change research, it has the potential the balance between individual rose out of the assumption of agreement. Second, achieving to exceed 200bn by end 201 . decisions and regulatory plentiful supply and measures the nited Nations’ sustainable In addition, our researchers requirements. When it comes success only in terms of development goals by 2030 have observed that ‘green is to regulation there is only on economic growth, is no longer will require between tn tn going rainbow’, as issuers worthwhile formula ‘As much as adequate. Economic growth in annual investment across and investors move beyond necessary, as little as possible.’ is an incomplete indicator of various sectors and industries. the purely environmental All these examples perspective. Green bonds, which demonstrate that sustainable focus primarily on environment development propelled by capital ‘There is a growing perception in developed and climate related matters, are markets is no longer ust a virtue, being oined by ‘blue’ bonds for but an absolute necessity. economies that the current economic model, which maritime and other social issues. Frank Scheidig is Deputy rose out of the assumption of plentiful supply All such ESG bond issuance is on Chairman of the OMFIF and measures success only in terms of economic the rise. Advisory Board and Global growth, is no longer adequate.’ Sustainable fi nance is a Head of Senior Executive rapidly developing market. In Banking at DZ BANK.
18 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_018_Scheidig.indd 18 10/01/2019 14:30 Looking past traditional market indicators Social issues gaining infl uence on fi nancial markets
Peter Zöllner of the population, and prevent human development. Sovereign rates, exchange rates and credit Bank for the wealth inequality gap from investors are being encouraged exposures. It will also be about International widening. to turn to sustainable investing gauging the consequences of Settlements This social inequality for example, by incorporating model risk. Any mistakes in has fueled opposition to environmental, social and implementing or understanding globalisation, free trade and governance criteria when new fi nancial models and hen refl ecting on changes human mobility, and renewed choosing their assets. These technology could lead to poor Win fi nancial markets over focus on austerity. This defi es the themes, after all, are closely decision making, fi nancial and the last decade, it is tempting long standing global economic connected to the management of reputational damage and shocks simply to look back on the events and political system, and with international reserve portfolios to fi nancial stability. and policies unchained since it, underlying policy. But such and sovereign funds. the 200 fi nancial crisis. These sentiment is also challenging the In addition, technology’s The years to come include the introduction of offi cials who work to preserve infl uence on the lives of fi nancial Throughout the last decade, unconventional monetary policy, and foster economic growth and market participants continues central banks have been macroprudential instruments to expand markedly. Buying and instrumental in shaping and negative interest rates, selling are more automatised fi nancial markets, owing to the the European sovereign debt ‘Social inequality has and convenient than ever before. extraordinary efforts they put in crisis and, more recently, the fueled opposition to Electronic and high frequency place to mitigate the effects of beginning of monetary policy globalisation, free trade trading, rules based funds, the fi nancial crisis. normalisation. An innumerable and human mobility, robo advisers and crypto assets In the years to come and as array of events has shaken up and renewed focus on are among the many examples monetary policy normalises investors monitoring markets challenging incumbent banking other long term, non fi nancial around the world. austerity. This defi es the business models. Policy makers concerns will probably be the owever, in the current long standing global are starting to ponder if the focus of the world around us and, economic and political economic and political macroeconomic indicators as a consequence, affect fi nancial landscape, it is necessary to look system, and with it, currently in place, like infl ation analysis and policy making. It is beyond market indicators and underlying policy.’ rates, refl ect these structural worth paying close attention to intraday monitors. Analysts must changes. how sovereign investors adapt focus on the big picture and on Those working in regulation, to their changing environment. the long term, non fi nancial supervision and risk Enhanced knowledge of issues that not only affect management must embrace geopolitical themes, social goals, fi nancial markets, but which innovation to pre empt risks demographics and technology will impact people’s day to day associated with new technologies will be key in the fi ght to activities for years to come. while simultaneously reaping preserve the long withstanding The social pressure that the benefi ts. Sovereign investors paradigms of political and led to events such as the K’s must prevent cybersecurity economic integration. decision to withdraw from the breaches, face fi nancial market Peter Zöllner is Head of the European nion, as well as fl ash crashes and avoid falling Banking Department at election outcomes in the S prey to procyclical trading the Bank for International and Europe, accumulated over algorithms. Their fi nancial Settlements. The views many years. Policy makers market analysis will not only be expressed here are his own should ask themselves what about estimating risk premiums and not necessarily those of they can do to provide better adequately and calculating the Bank for International living standards for the ma ority # the hedging costs of interest Settlements. November 2017
OMFIF.ORG JANUARY 2019 BULLETIN 19
BTN_01.19_019_Zöllner.indd 19 11/01/2019 09:57 Bulletin at 100
Towards united front in impact investing Adopting IFC Principles will help defi ne impact investment standards
Karin Finkelston standards (‘Operational integrate impact considerations report will map out the size International Principles for Impact into investment decisions and potential of the impact Finance Management’), in close throughout the investment investing market, identify the Corporation partnership with the fi nance life cycle: strategy, origination different players and investment industry. With regard to impact and structuring, portfolio strategies, and explain the mpact investment was still and return, IFC is one of the management, exit, and analytical underpinnings of Iconsidered a niche market in original impact investors, independent verifi cation. these principles. It will show 2010, when green bonds were in with 62 years of experience. These principles will help avoid how IFC applies the principles their infancy and the notion of Furthermore, it is the largest potential ‘impact washing’ – a with its anticipated impact incorporating environmental, impact investor, with $57bn in its key concern, which investors measurement and monitoring social and governance themes portfolio under management. raised during the development of impact management system. in asset allocations was far from the Principles. Investors must get behind the mainstream. Today, the market Industry partnership It is important before investing principles and sign on to them is at a critical infl ection point. IFC and other development to defi ne what impact is if we want to attract more funds A growing number of investors fi nance institutions have been intended, set up targets, monitor for impact. Now is the time to – including a new generation investing for impact for many performance, take corrective show a unifi ed front and work of younger investors – are years, and now a much wider action if things go wrong and collectively towards meeting looking to align their investment range of private investors are report the results at the end. It the SDGs. strategies to the United Nations interested in this dimension. is critical to get the principles A common and agreed Sustainable Development Goals, IFC has contributed to right, and thus IFC consulted approach to managing to achieve positive outcomes the Equator and Green Bond widely to obtain additional input investments for impact will for society alongside fi nancial Principles. Using this experience, on the draft. benefi t all in the industry. returns. it worked with market players The fi nal principles and Karin Finkelston is It is important to seize this to create standards for impact the fi rst set of signatories will International Finance momentum to scale up the investment. The IFC worked be announced at the World Corporation Vice-President, market rapidly from its current in partnership with a core Bank Group’s spring meetings Partnerships, Communication $228bn size. Institutional group of asset managers, asset in April 2019, where it will and Outreach. investors hold trillions in assets owners, and development publish a report surveying the under management globally. If fi nance institutions to work on impact investing market. This a fraction of this pool of money a set of draft principles. These # can be tapped, the market for refl ect emerging best practices June 2018 impact investment could grow by drawing on the accumulated
‘A growing number of June 2018 exponentially. experience of IFC, its peer Vol.9 Ed.6
ean oissinot on green fi nan e teris i ga vis on b o ain initiatives investors are looking to aria apia on atin meri an infrastru ture i y ry e on re it un ertainty To realise that potential, it development institutions, as well In onversation it ani ab a i Su anne is opri on omen s pensions is essential to develop clear as a wide range of public and align their investment and agreed standards for the private institutions that have strategies to the United market. Many investments are been investing for impact. Nations Sustainable labeled as ‘impact’, yet there The principles describe is no agreed upon standard as essential features of managing Development Goals, to what constitutes an impact investment funds with the to achieve positive investment. intent to achieve positive social, outcomes for society International Finance economic or environmental alongside fi nancial ere is no p anet Corporation is spearheading impact alongside fi nancial returns.’ an initiative to develop such returns. They are designed to esgBook 1.indb 1 01/06/2018 10:37
20 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_020_Finkelston.indd 20 10/01/2019 14:36 2019 PREDICTIONS AnAn eyeeye onon thethe horizonhorizon Members of the OMFIF advisers Will Brexit inspire other countries to reconsider their membership of the EU, or network give deter them? their forecasts for Denis MacShane, UK minister of state for Europe, 2002-05 the year to come The UK’s withdrawal from the European Union has been a boost to the EU. Since the June 2016 UK membership referendum, most in economics, opinion polls in other EU states have shown an increase in support for membership of the bloc and the euro. geopolitics and Before June 2016, anti-EU politicians like Marine Le Pen in France, the Alternative for Germany party, Matteo Salvini in central banking. Italy and the Swedish Democrats included in their speeches and party programmes Brexit-inspired references to quitting the euro and even the EU. But by December 2018, Brexit was seen as only a negative for the UK. There are no votes across the Channel for What will be the impact of Fed tightening politicians who admire Brexit or argue it is a model to be copied. on the global economy?
Will the Indian government continue to put Mark Sobel, OMFIF US Chairman pressure on the Reserve Bank? The outlook for Federal Reserve policy in 2019 is unsettled. The Fed has recently shifted its rhetoric, indicating the 2019 rate path Meghnad Desai, emeritus professor of economics at will be data-dependent. Markets see limited prospects for 2019 rate the London School of Economics and Political Science increases, despite a strong labour market and solid outlook into the The government faces a diffi cult election in April and May this year, middle of next year. and the temptation to spend money to curry favour and ‘buy votes’ In the past, when the Fed lowered interest rates to support the US is extreme. The Reserve Bank of India is the only institution from economy, analysts viewed this as an attempt to depreciate the dollar which the government can secure enough money; doing so will do and push capital to emerging markets, while quietly cheering the US no good at all for the reputation of India as a responsible fi nancial effort, as this would improve export opportunities. When the Fed investment centre. But the politicians are likely to take a short-term increases interest rates, some argue the US is absorbing capital from view of such matters. emerging markets, while cheering the higher growth causing the The government may instruct the RBI to breach its standards rate increases and the associated export opportunities. of risk assessments that have determined the size of its reserves. The best thing the Fed can do for the global economy is focus Following the resignation of Urjit Patel as governor in December on achieving its dual mandate of maximum employment and 2018, citing ‘personal reasons’, pundits will have to wait and see price stability, while ensuring fi nancial stability is preserved and whether his successor, Shaktikanta Das, will prostrate before the clearly communicating its monetary policy intentions. Other major government or stand up against Delhi. economies with macroeconomic space should use it. >>
OMFIF.ORG JANUARY 2019 BULLETIN 21
BTN_01.19_021-023_predictions.indd 21 11/01/2019 10:23 2019 predictions
Which country, if any, is most likely to adopt Bank of Finland Governor Erkki Lukanen (69) and Oesterreichische the euro next? Nationalbank Governor Ewald Nowotny (75). Christine Lagarde, managing director of the International Monetary Fund, is young Miroslav Singer, Chief Economist, Generali CEE enough but so far has ruled herself out, which suggests the ECB is Holding unlikely to appoint its fi rst female president. Moreover, Lagarde A country’s decision to adopt the euro is based on political, rather is French, and the bank’s last three presidents have been Dutch, than economic, merits. The government must identify clear benefi ts French and Italian. Spain’s Luis de Guindos has just taken over as for its electorate and use these to ‘sell’ the idea of the single ECB vice-president. Therefore, the obvious direction is northwards currency. Central and eastern European economies currently enjoy to Germany. My candidate is Jens Weidmann, president of the low infl ation and a relatively stable exchange rate. They do not see Bundesbank. He has the steel needed to back reforms. any reason to adopt the euro, nor could they justify such a move to their constituents. What can we expect in 2019 from Venezuela The country most likely to adopt the euro next is Bulgaria. In in the light of its hyperinfl ation crisis? recent years, the country has weathered a series of banking crises, Steve Hanke, Johns Hopkins University which served as a stark reminder of the disadvantage of fi xed exchange rates. As a result, Bulgaria is willing to accept any new Hyperinfl ations are rare, strange beasts. There have only been 58 conditions to join the exchange rate mechanism and the euro area. episodes of hyperinfl ation in history, and oddly enough, they are very easy to measure. This is done by converting changes in the What would be the greatest risk to fi nancial local currency’s exchange rate with the dollar on the black market markets in 2019? into an implied infl ation rate via purchasing power parity. I use PPP with high-frequency data to measure Venezuela’s infl ation rate. At Colin Robertson, SW1 Consulting this writing, Venezuela’s annual infl ation rate is 72,062%. The greatest risks to fi nancial markets in 2019 will again be However, while hyperinfl ation can be measured accurately, it political, many with a populist theme. Old problems remain, such is impossible to forecast. Surprisingly, this has not stopped the as North Korea and European politicians catering to popular revolt. International Monetary Fund from dispensing with economic Newer issues of government interference in central bank policy, US science. It has produced a steady stream of fi nger-in-the-wind dismissal of global institutions, and the regulation of social media forecasts. This culminated with the ridiculous 2018 year-end companies will gain in prominence. None of this will be readily forecast of 2,500,0000% annually. resolved, certainly not by cutting interest rates, and a ‘buy the dips’ investment strategy (buying stocks after their price has dropped) is After the year of #MeToo, what progress are we questionable. The good news is that markets are starting off 2019 on likely to see in the gender agenda in 2019? What key less demanding valuations after a poor year in 2018. A wide range of policies will be implemented to help women progress risks are being publicised daily in the media. in fi nancial institutions? Vicky Pryce, Centre for Economics and Business Who will succeed Mario Draghi as president Research of the European Central Bank and what will it mean for the euro area? The pay gap and results of pay reviews enforced by the UK government have exposed not only discrepancies in pay and Caroline Butler, Walcot Partners bonuses between men and women who perform ‘equal work’ but also Interest rates are negative or fl at and quantitative easing must be crucially the lack of women in senior roles. The fi nancial sector does replaced by quantitative tightening. On the political front, French badly in this area, not just in the UK but internationally. Women on President Emmanuel Macron has hit a brick wall on his reforms, and Germany is in the midst of a change in leadership. Italy has never been keen on respecting EU-imposed budget defi cit rules. And just in case no one has noticed, in 2019 Europe may be about to fracture ‘Delivering stability in a over how to set future trade deals with the UK. Mario Draghi must be replaced by a heavyweight central banker world that is so fi nancially with a reputation for prudence. They should be someone who can persuade German politicians that the essential reforms of the interconnected will pose fresh euro area’s institutions must be supported and will not be funded challenges to central banks, with entirely by German taxpayers. Draghi’s successor must have direct experience of economic policy. They should be in their early 60s increased risks of politicisation.’ at the start of their eight-year mandate. This rules out former National Bank of Belgium Governor Jan Smets (68 years old), former
22 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_021-023_predictions.indd 22 11/01/2019 10:23 executive boards are a help, but a limited one. It is having enough Issues relating to fi ntech and the advent of decentralised female executives within fi rms that matters more, and this is what cryptocurrencies and their potential impact on monetary policy the Hampton-Alexander review, supported by the UK government, would also need to be addressed. Central banks must likewise be is now focusing on. concerned with shoring up their defences against cyber attacks. Some fi nancial institutions are responding with their own internal targets. But policy-makers and heads of companies must speed up this process in 2019. That can only be done by introducing How will political developments change time-limited quotas for female senior representation in fi rms. That the economic outlook for Brazil? will force a change in incentives, pay and rewards to encourage Otaviano Canuto, former executive director, investing in changing the macho working culture. World Bank
What will be the greatest source of In his inaugural speech Paulo Guedes, Brazil’s economy minister, macroeconomic instability in 2019? highlighted three main guidelines for the new government’s economic policy. Two years ago, the senate approved a 20-year Elliot Hentov, State Street Global Advisors cap on public spending. To ensure this ceiling is feasible and For the fi rst time since the 2008 fi nancial crisis, the balance sheets sustainable, the government will introduce pension reforms and of global central banks will be shrinking. In other words, the net carry out a review of public spending. Second, Brazil will pursue fl ow of liquidity provision will turn negative for the fi rst time and a privatisation programme. This includes reinforcing the trend a major tailwind of the past 10-year recovery is reversing. If the toward lower shares of public sector banks in credit provision. logic of quantitative easing was to use fi nancial market dynamics Third, a simplifi cation of the tax system should improve the (lower long-term rates, portfolio rotation, wealth effect) to boost business environment and reduce its burden of resource waste on real economic activity, then the opposite – quantitative tightening the private sector. – should mirror this effect. These three guidelines should help the Brazilian economy In 2018, the rapid reduction of liquidity raised volatility across overcome the combination of fi scal obesity and anaemic fi nancial markets. From the 2016 peak of roughly $160bn per month, productivity of the last decades. No wonder markets reacted so G10 central bank liquidity infl ow dwindled to around $23bn per well when they were announced. If in the coming months the month by late 2018. This is bound to become worse in 2019 as this government and congress turn Guedes’ speech into policy, private fi gure crosses zero. The key question is whether turbulence in investments can be expected to surge. There lies the major hope for fi nancial markets will remain contained or spill over into the real Brazil’s growth recovery to speed up. economy. Bearing in mind that this tightening is parallel to the rate cycle, even a pause in interest rate increases would not forestall this development. How will the confrontation between the European Commission and Italy over the What should central banks be most latter’s budget unfold? concerned about in 2019? Antonio Armellini, former Italian ambassador to Algeria, Hemraz Jankee, former Chief Economist, Central Bank India and Nepal of Mauritius Italy’s running feud with the EU has been replaced by a provisional Central banks will be scanning a new and uncertain landscape in truce. Initial blustering has given way to careful negotiation by 2019. There are signs of a global economic slowdown, and some Prime Minister Giuseppe Conte under the silent aegis of President pundits are predicting a global recession. Sergio Mattarella. The European Commission has agreed not to The era of one policy objective (infl ation targeting) and one tool initiate for now an excessive debt procedure following a cut in the (interest rates) appears to be over. Issues around crisis interventions projected budget defi cit for 2019 to (a gimmicky) 2.04% from 2.4%. have also incited questions about the operational independence But the situation remains fraught and few believe that the budget of central banks. Addressing the ‘new normal’ is the immediate numbers will ultimately hold up. policy challenge facing central banks. They will need to balance The populist League and Five Star Movement are in the need to sustain growth and reduce the risks of instability that electioneering mode and will hold on to their fl agship spending could result in the eventual unwinding of monetary stimulus. measures of universal citizens income, fl at tax and pension reform Delivering stability in a world that is so fi nancially interconnected in the run up to European elections that could reverse their present will pose fresh challenges to central banks, with increased risks of power relationship. An uneasy and occasionally confrontational politicisation. stalemate with the EU will continue until then, after which the Downside risks such as the ripple effects of a trade war between realities of a sagging economy will start kicking in. The government the US and China, emerging market turbulence and the risk of a declares itself confi dent of living out the fi ve years of the legislature, messy exit of the UK from the EU add further to uncertainty. but early elections by the summer are on most people’s minds. �
OMFIF.ORG JANUARY 2019 BULLETIN 23
BTN_01.19_021-023_predictions.indd 23 11/01/2019 10:23 In conversation
Ensuring a stable euro
John (Iannis) Mourmouras, senior deputy governor of the Bank of Greece, and Danae Kyriakopoulou, OMFIF’s chief economist and head of research, discuss the future of the euro as it caps off a turbulent decade, and Greece’s post-bail-out prospects.
Danae Kyriakopoulou: What on developing a budget instrument – tools to use if tightening is surplus targets, along with will the euro’s third decade be for the euro area and setting the deemed necessary, including slashing corporate tax rates like and what role will Greece terms of reference for the common raising interest rates, increasing drastically and gradually, in line play? Are fears of a breakup of backstop to the single resolution reserve requirements and using with the fiercely competitive monetary union sti ustifie fund, was a welcome step. But reverse repurchase operations to corporate tax rates applied by and what needs to be done to progress is needed on the banking drain excess liquidity. No matter Greece’s neighbours. strengthen the currency union’s union’s third pillar, the European what the optimal size is, the Some EU member states, such architecture? deposit insurance scheme, and the central bank must communicate as Belgium, Denmark, Finland, John (Iannis) Mourmouras: The capital markets union. Proposals to markets what the new ‘normal’ Ireland, Sweden and Italy, have euro is the official currency of 1 such as a European safe bond and a balance sheet size continuously recorded primary countries and 340m citizens, and European monetary fund will help will be. surpluses above 3.5% (on average) the second most important global mitigate the divergence between DK: The Greek bail-out of their respective GDP. Their reserve currency. Its introduction core and periphery countries and programme ended in August growth rate was more than 1. . was a milestone in post-war break the vicious cycle between 20 8. o onfi ent are you However, economic activity is Europe, comparable to the banks and sovereigns. in the economy’s long-term affected mainly by changes in reunification of Germany and the DK: How do you see the prospects and what should be fiscal policy. The composition breakup of the Soviet Union. European Central Bank’s the reform priorities to ensure of already-achieved primary The first decade of a prolonged role evolving in the post- a successful return to market surpluses determines growth cycle of economic expansion and quantitative easing era and finan ing impact, more so than their levels. prosperity was followed by the what would its role be in the JM: There should be no DK: What lessons do you draw 2010 12 sovereign debt crisis, next downturn? complacency or slackening of on the relationship between resulting in high unemployment JM: The ECB will continue effort on behalf of the national central banks and national and poor growth performance. reinvesting the principal payments authorities, especially in 201 , governments at times of crisis Despite continuing divergence from maturing securities an election year in Greece. management, and did these put between the North and the South purchased for an extended The government must commit central bank independence to with regard to real wages and period of time, contributing to the implementation of the test in the case of Greece? productivity, overall the single to accommodative monetary growth-enhancing reforms, JM: Central bank independence currency has been a success. policy and favourable liquidity particularly in the public sector and its sister concept, Nevertheless, it would be naïve conditions. (including administrative reform accountability, were challenged to attribute the debt crisis solely The main medium-term and speeding up of judicial during the 200 financial crisis to the failings of some European challenge for the ECB is the procedures). This will enhance the and the euro sovereign debt crisis. Union member states without question of how long it will take country’s credibility in the eyes of These challenges fall into two recognising the shortcomings of to reduce the size of its balance international capital markets and categories first, the independence monetary union’s architecture. sheet. There is no need to rush; it credit rating agencies. of central banks has been put To address the next global is important to take into account Following a period of prolonged into question by external parties. downturn and ensure a stable euro, the uncertainty created among fiscal consolidation and private Second, even if independence is economic and monetary union market participants and avoid divestment, the country needs not formally challenged, it may be must be deepened. The agreement, any potential market disruptions. an investment shock. In 2014, compromised as a result of altered at last December’s euro summit, There are other – conventional I suggested reducing primary conditions.
24 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_024-025_InConversation-COPY TC.indd 24 11/01/2019 10:03 ‘I strongly believe it is crucial to prevent populists from dictating the agenda in the forthcoming European elections. They lack the pragmatism of mainstream parties.’
External challenges to central bank independence stem mainly from political pressure. For instance, in the euro area, QE has been challenged both for being too expansive and too limited. On the other hand, the independence of central banks may be scrutinised due to concerns relating to whether a central bank with an extended mandate can operate transparently and have an appropriate degree of accountability in a democratic political and economic system. All in all, an accountable, independent central bank needs broader support from the public. Profile Clearly, with persistent negative Education: Holds a PhD from rates, support for central banks the University of London and is a is likely to drop. If a signifi cant graduate of the London School of problem remains unsolved (for Economics and Political Science. instance, a high stock of non- Career: Mourmouras is senior performing exposures), the public deputy governor of the Bank of is bound to question the role of the Greece and chair of its Financial supervisor. Fiscal and monetary Asset Management Committee. authorities should have distinct He was previously Greek deputy roles in the economy and respect fi nance minister and chief each other’s autonomy. economic adviser to the Greek Given an increased role today prime minister, as well as head for forward guidance in monetary of the prime minister’s economic offi ce. Mourmouras has held policy and the management of several academic positions at expectations, the head of a central universities in Europe, Britain bank must be selected with the and the US, and currently is utmost care. It goes without saying professor of macroeconomics the right candidate should have at the University of Macedonia in a spotless reputation and possess Thessaloniki, Greece. formidable technical expertise and communication skills.
OMFIF.ORG JANUARY 2019 BULLETIN 25
BTN_01.19_024-025_InConversation-COPY TC.indd 25 11/01/2019 10:03 Money Matters
Below trend growth forecast for 2019 Troubling signs in euro area point to possibility of another recession
Juan Castañeda and Tim Congdon year. In the euro area, the tensions between Fortunately, with infl ation very low Institute of International Monetary Research Italy’s populist government and European almost everywhere, most central banks can authorities are troubling. Moreover, Peter reverse their current tightening posture if fter the relative buoyancy of 2017, we Praet, the ECB’s chief economist, has warned necessary. There is certainly no need to raise Ahave been raising concerns in 2018 that that long term refi nancing operations which interest rates to contain infl ation over the a slowdown in money growth in leading for years have been fi nancing for Europe’s medium term. A recession is unnecessary economies presaged a weakening in the weakest banks may not be renewed in 2020. and ought to be avoided. The most worrying global economy’s pace of demand and output Another euro area recession cannot be ruled potential exception is the euro area, where expansion. These have been ustifi ed by the out. In the K, broad money growth as renewed money stagnation is possible. The now evident growth deceleration in major measured by the M4x aggregate has been ECB lacks the same freedom to relax policy economies, notably the euro area and China. weak in the last few months. as other central banks. Some of its actions Japan, as well as the UK, euro area and Money trends in the two largest favour certain member states over others and US, have an annual money supply growth developing countries seem more benign. constraints arise from its multi-government rate of less than 4%. This is a meagre China and India still enjoy positive money membership. The end of the ECB’s asset fi gure, consistent with at most trend growth, with an annual rate almost in purchasing programme in 2019 may result in growth in demand and output in early 2019. the double digits. However, in the last a fall in money growth towards zero, which Prospective short-term developments in two decades, this number has often been could lead to another recession. money growth are discouraging. well into the teens. The People’s Bank of Juan Castañeda is Director and Tim The US Federal Reserve’s determination China is determined to maintain a steady Congdon is Chairman of the Institute of to run off the assets acquired in quantitative rate of economic advance. It cut reserve International Monetary Research. For easing exercises from 2008-14 is likely to requirements three times last year to a more detailed analysis of the latest hinder signifi cantly money growth in 201 . encourage bank balance sheet expansion. money trends, see the IIMR monthly The European Central Bank has confi rmed However, money growth is at best moderate report at https://www.mv-pt.org/monthly- it will stop buying assets at the start of this by Chinese standards. monetary-update.
The Economics of Monetary Unions. Past Experiences and the Eurozone. Sponsored by the Institute of International Monetary Research and Santander Universities UK & 22 February 2019 Vinson Building University of Buckingham RSVP: [email protected] e IIMR is a liated with
26 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_026_MoneyMatters.indd 26 11/01/2019 09:58 Worldview This month’s expert analysis
Kelvin Tan on a 29 Singapore model for Gary Smith on 32 Africa sovereign funds renminbi reserve share rising 60,000 Temasek AUM = Joaquim Levy on Sgd308bn steering capital 50,000 28 towards green fi nance 40,000 Temasek AUM = Sgd100bn 30,000 Temasek AUM = 20,000 Sgd2.9bn
10,000 Temasek AUM = Sgd354m 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Botswana Hong Kong South Korea Singapore Sub-Saharan Africa South Africa
Shaokai Fan on Russia Darrell Delamaide on leading surge in gold Powell equivocating buying 30 on rate rises 35
OMFIF.ORG JANUARY 2019 BULLETIN 27
BTN_01.19_027_Worldview.indd 27 10/01/2019 14:42 Green fi nance
Steering apita to ar s green fi nan e Fostering solidarity and accountability on climate risk in the banking sector
Joaquim Levy economic activity and fi nancial providers, such as credit rating World Bank risks. agencies and pension funds’ The World Bank Group investment consultants. This 0 recognises the adverse impact can be reinforced by longer term Proportion of people in that shocks to the environment mandates that shift the evaluation extreme poverty who present to ending extreme of investment performance live in countries that are he corporate sector has poverty and boosting shared towards sustainability and long vulnerable to climate risk Tbecome more conscious of prosperity. Estimates show that term goals. how climate change can weigh more than 0 of people facing The World Bank fosters co insurers and other fi nancial on business operations and extreme poverty are in countries operation across the investment institutions. Some studies using disrupt supply chains. Insurance that are politically fragile or value chain and between large samples of infrastructure premiums are moving in the wake vulnerable to climate risk. This regulators to promote the debt suggest that if current of extreme weather events, and underscores the importance integration of sustainability regulations were calibrated also because insurers have begun of connecting growth friendly issues into fi nancial decisions. to refl ect the low default risk to internalise the potential impact policies with climate smart The Bank has partnered with and higher recovery rates in of climate change. Investors investment to strengthen these leading institutional investors to infrastructure debt over the last are rewarding companies that countries’ resilience. incorporate ESG principles into 30 years, a signifi cant amount of integrate good environmental, fi xed income strategies, and is regulatory capital could be freed social and governance practice Global co-operation building a global database on the in both developed and emerging into their activities. A consistent response from ways companies disclose how economies. Policies that foster greater policy makers will help the their business activities comply Availability of fi nance is a disclosure will help markets banking sector better manage with ESG principles. key component in facilitating to price climate related risks climate related risks on their In late 201 the World Bank systemic transitions and depends better and identify sustainable balance sheets. It will also published guidelines on green on the right price signals and investment’s long term benefi ts. help the growing number of bond proceeds management economic incentives. This is not Better data, together with new institutional investors and asset reporting. The Bank has also different in the case of funding models that incorporate scenarios managers that are taking into engaged in the development of mitigation and adaptation with feedback effects and non account ESG considerations to a taxonomy for green fi nance efforts to tackle climate change. linearities, can help policy shift their focus to long term and is collaborating with other Fostering the development of makers price and address the factors from short term gains. members of the International clear, rigorous frameworks to consequences of climate change. This co operation between Capital Markets Association in evaluate environmental risks can In this context, the contribution policy makers and the fi nance advancing the Green and Social therefore bring extraordinary of fi nancial regulators is unique, sector can occur in several ways, Bond Principles and the role of results. Market funded mitigation as they defi ne the parameter of starting with requiring asset sustainable development bonds. and adaptation efforts can address fi nancial reporting and prudential owners to disclose their strategies These bonds help fund policy real, existential threats and, as requirements for safeguarding on climate risk. Such disclosure reforms and actions that enable new technologies evolve and fi nancial stability. can foster greater accountability the expansion of green and social relative prices ad ust, they can While there are empirical and healthy competition in investment around the world. create many new obs and increase limits to the scope and reliability the industry. Reconciling The Bank is also working with productivity, if capital fl ows are of forward looking assessments fi duciary responsibility with regulators to explore how new adequately steered. of climate risk, regulators can long term goals through clear evidence on the favourable risk Joaquim Levy is former use new models and data to metrics can provide a useful profi le of infrastructure could Managing Director and Chief understand better and address vocabulary for asset managers, be better refl ected in lower inan ia ffi er of t e or the linkages of climate change, institutional investors and service regulatory capital charges for Bank Group.
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BTN_01.19_028_Levy.indd 28 10/01/2019 16:48 Multicurrency system
Renminbi’s global reserve share rising China on the way to eventually contending with the dollar
Gary Smith highlight the technical point allocations to the renminbi to China by a Japanese prime Barings that nations don’t hold their own have refl ected the existence, but minister since 2011, and used currency in foreign reserves. not the magnitude, of trading the occasion to announce that As the world’s largest holder relationships with China. A the People’s Bank of China and of foreign reserves, China recent IMF paper suggests the Bank of Japan had signed a $30bn sset class diversifi cation effectively lowers the global international monetary system currency swap agreement. This Acontinues to be a key theme reading for renminbi in global is becoming tripolar. Although is fi ve years after the previous for central bank foreign exchange reserves. Feedback from central still dominated by the dollar, agreement had expired during a reserves managers. A survey at bankers in Asia supports the the renminbi trading bloc has period of frosty relations. a recent gathering of regional view that over the next fi ve years already surpassed that of the One consequence of current US central bankers in Asia showed a move to a 5% global share euro in terms of importance. trade and foreign policy action that more than half had amended is probable. This would take The renminbi bloc is centred has been to help thaw relations their strategic asset allocation in the renminbi past the yen and on Asia, and Asian nations (even between these East Asian the last two years, and more than sterling into third place in the when excluding the Chinese neighbours. It may also help two-thirds had expanded the reserve currency league table. total) are among the largest China extend its economic and permitted number of investible holders of foreign reserves in political infl uence throughout asset classes. Many had either Contend with the dollar the world. These countries will Asia, encouraging the deepening invested in, or had considered, There are three reasons why we be the key drivers if reserve of fi nancial ties, including ‘non-traditional’ asset classes, at Barings believe allocations currency weights are to change. the building of renminbi- including equities. Almost all to the renminbi will continue to Second, in response to rhetoric denominated foreign reserves. expected the Chinese renminbi increase. about the US-China trade Finally, the onshore Chinese to become more important as a First, most nations have war and a rise in geopolitical bond market is the third reserve currency over the next explained their decision to add tensions, Beijing may seek to largest in the world, according fi ve years. renminbi to their reserves as a deepen both trade and political to Bloomberg data. As index It is noteworthy that despite need to refl ect growing trade relationships with Asian providers continue to include a weaker renminbi/dollar rate fl ows with China. neighbours. In October 2018, Chinese markets, there will this year, the Chinese currency However, these initial Shin o Abe made the fi rst visit probably be rising pressure for has increased its share in global bond investors, including global reserves, according to foreign reserves managers, to International Monetary Fund ‘Initial allocations to the renminbi have increase their allocations to the data. An IMF report released at renminbi-denominated bond the end of September 2018 shows refl ected the existence, but not the magnitude, markets. a jump in renminbi holdings of trading relationships with China. Although Given these factors, the of around $50bn in the second still dominated by the dollar, the renminbi renminbi is likely to continue quarter. Less than a decade trading bloc has already surpassed that of the climbing the reserve currency after the launch of the renminbi euro in terms of importance.’ league table and will shortly internationalisation initiative, become the third most widely we estimate that more than 60 held currency after the dollar and central banks have renminbi in the euro. their reserves. But allocations are Gary Smith is a Member of the still relatively small. OMFIF Advisory Council and The IMF data suggest the Member of the Macroeconomic global share of renminbi is and Geopolitical Research around 2%, but we should team at Barings.
OMFIF.ORG JANUARY 2019 BULLETIN 29
BTN_01.19_029_GARYSMITH.indd 29 10/01/2019 14:44 US
Fed’s Powell equivocates on rate rises Not wanting to play politics, policy-makers get played
Darrell This simple logic belied Powell’s conference, journalists peppered an FOMC meeting and who Delamaide declaration of independence. Powell with sceptical questions. went straight into the holiday OMFIF ‘Political considerations have Why, one inquired, if you are period after the 19-20 December played no role whatsoever in our undershooting your infl ation meeting. discussion or decisions about target and your own forecasts say Early that month, Atlanta monetary policy,’ he said in you will continue to undershoot Fed Chief Raphael Bostic here is little doubt President response to a question at the it next year, are you raising rates? suggested the Fed should proceed TDonald Trump wanted the US press conference. ‘Nothing will Powell did not have an answer cautiously toward the ‘neutral Federal Reserve to forgo another deter us from doing what we and virtually stammered his reply rate’ regardless of economic rate increase in December. think is the right thing to do.’ that a healthy economy ustifi es turbulence. ‘I am not seeing However, he knew the Fed could Except maybe if the president the rise. And yet Fed policy- clear signs of overheating, nor not be seen as bowing to his coincidentally tells you to do that. makers scaled back their forecasts am I seeing any indications of wishes. So he settled for the next On 4 January, at a conference in for growth this year and next a material weakening in the best thing, with his barrage of Atlanta, responding to signs of amid signs the economy is losing macroeconomic data at the tweets the day before the Federal fright on equity markets, Powell momentum. ‘The only way to moment,’ he said. A voting Open Market Committee meeting. appeared to row back, saying achieve infl ation symmetrically member in 2018, Bostic backed He trapped the committee’s markets had moved ‘well ahead around 2 is to have infl ation up his remarks by making members into going through with of the data’ pricing in risks to the symmetrically around 2%,’ Powell the December rate increase the increase, and set them up US economy, and emphasising said, ‘and we have been close to unanimous. as a scapegoat when, not if, the the Fed would take a ‘patient’ that. We are not there yet, and we St. Louis Fed Chief James economy swoons. approach to monetary policy have not declared victory. That Bullard continued to oppose the Fed Chair Jerome Powell tightening. ‘US data seem to be on remains to be accomplished.’ rate rises, urging policy-makers was at pains to deny politics track to sustain good momentum to delay the December increase as played any role in the FOMC’s into the new year.’ Economic turbulence the yield curve inverted – that is, unanimous decision. But the The Fed had set the trap itself. The other equivocation that short-term rates topped long- panel was certainly not free to With its overconfi dent forward stupefi ed investors was Powell’s term rates, which is often taken as stand pat, even if data suggested guidance and dot-plot graphs, reference to economic modelling, heralding a recession. there was no compelling need to it baked in the December rate even as the stock market was ‘The current level of policy is carry through with their fourth increase and made itself a target headed for disaster. ‘There has about right,’ he said two weeks quarter-point increase of 2018. of Trump criticism. At the press been a sense of concern among before the FOMC went ahead with business people and market the rate rise anyway. Bullard did people about global growth, not get a vote in December, but and that may be partly about rotates into a voting position this trade tensions, it may be partly year. about a variety of things,’ Powell Minneapolis Fed President responded to a question about Neel Kashkari also called for the Fed’s assessment of risks. ‘If delay in further increase. ‘Let’s you just mechanically drop into a just step back and see what the model of the US economy tariffs, economy presents us,’ he said in you do not see very large effects.’ early December. Kashkari was Otherwise, it was a short not a voter in 2018 and will not be month for speechifying by Fed again until next year. policy-makers, who observe a Darrell Delamaide is US Editor quiet period the week before at OMFIF.
30 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_030_Delamaide.indd 30 10/01/2019 14:44 Financial stability
Insuran e: an ans er to fi s a ris Developing countries shielding fi nances from unexpected events
ar e o for this type of insurance is electricity company would then Rather, it is parametric. If the iuga e small, incomplete and imperfect. be forced to import diesel and event happens, countries get a World Bank Politicians do not always trust absorb the loss. Passing it on fi xed amount or a fi xed price. that private insurers will charge to consumers was out of the This triggers a rapid pay out a fair premium or pay up when question politically. and eliminates problems of crisis comes. Investors sometimes In 201 , the World Bank played ‘moral ha ard’. There is neither inance ministers’ fi scal plans doubt the data that civil servants the same intermediary role for time consuming loss ad ustment Fcan be blown off course give them or there may not be municipalities in the Philippines, nor incentive to under-invest by unexpected events over any data available. Sometimes which bought an insurance in prevention. If anything, the which they have no control. A neither side has the capacity policy against typhoons. expense in the coverage signals government may incur massive to deal with the technicalities Last year, the Bank arranged to voters that their government relief expenses after a tsunami. of modelling, monitoring and coverage against earthquakes is conscious of and serious about A drought could ruin a country’s certifying an incident. It can be for the Pacifi c Alliance nations the risk in question. main export crop. igher oil diffi cult to draft a billion dollar of Chile, Colombia, Mexico and Third, compared to total public prices may push up the value of contract based on the do ens of Peru. At 1.4bn in total cover, expenditures, the cost of hedging gasoline subsidies. There could numerical parameters that make it was the largest deal of its fi scal risks is minimal. Annual be a sudden rise in interest rates up an earthquake. kind. The intermediation took premiums for a policy against on a country’s foreign debt, or an many forms advisory, capacity earthquakes rarely exceed appreciation of the currency it u ti atera institutions building, brokerage, insurance of the value of the cover. Also, borrows. The list goes on. Enter multilateral development and reinsurance, trading of under most national legislations, Public accounts are riddled banks. They can be a bridge mirror ‘catastrophe’ bonds or of insurance will not count as public with risks. They can derail between governments and derivatives, and combinations of debt, as there is no principal austerity or worsen profl igacy investors, if that serves economic all these. Its value was always in repayment involved. and diminish economic growth. development. For decades, the connecting demand and supply. Finance ministers in This can have devastating bridge took the form of lending developing countries may not consequences for a developing – those banks would borrow in eyon bu get stabi ity necessarily rush to insure their country, erasing years of progress the global market and on lend to edging fi scal risks carries budgets, but it will form part in poverty reduction. individual countries. Over time, benefi ts beyond budget stability. of sound risk management It is no surprise that policy- public borrowers and private First, it may reduce the cost strategies, together with makers in emerging economies creditors grew comfortable of borrowing. Credit rating emergency funds, reserves and have started looking for ways to dealing directly with each other. agencies will take into account contingent credit lines. There buy insurance against geological, Now the latter supply the bulk of that a country’s fi scal hori on is will be a learning process. climate, commodity and fi nancial the former’s fi nancing needs. less risky and may give its debt Middle income countries will risks. Some have become quite A similar evolution is a better grade. That lowers the lead, with poorer ones taking profi cient at it. Mexico has been happening in the sovereign interest rates the country pays. longer. Adoption will accelerate using put options since the early insurance market. In 2013, the Whether the saving on interest if natural disasters occur more 1 0s to hedge its fi scal revenues World Bank helped Uruguay payments is enough to offset the frequently. The market will from a sudden fall in the price of buy its fi rst coverage against cost of the insurance policy is an reward governments that buy the oil it sells. urricane prone droughts. This broke the link empirical question. I have found insurance through better spreads Caribbean islands have been between the weather and the no evidence of such a ‘free lunch’. on their debts. While it may take operating a catastrophe facility country’s fi nancial health Second, this class of insurance time, the direction is clear. since 2007. when rains failed, hydropower is not indemnity there is no ar e o iuga e is ire tor of owever, for an average production would come to a compensation for the actual fi nan ia a visory an ban ing developing country, the market standstill. The state-owned damage caused by an event. at t e or an .
OMFIF.ORG JANUARY 2019 BULLETIN 31
BTN_01.19_031_Giugale.indd 31 10/01/2019 14:45 Asia
Singapore model for Africa sovereign funds Merit based and outward looking approach leads to effi cient portfolio growth
Kelvin Tan must invest in transformative It started providing the to strengthen its competitive Core Advisory projects. Yet, of the 12 African companies in its portfolio with advantage as a trade, maritime funds, only seven have a clear more capital, and gave them and shipping hub. Temasek’s mandate to do so: Nigeria, more management independence involvement with Singapore Rwanda, Ghana, Angola, on a results-based reward Telecommunications led to the Senegal, Gabon and Morocco. system. Between 1974-83, the company’s successful initial sian sovereign funds have value of Temasek’s investment public offering in 1993, when Aplayed an important role Clear objectives portfolio increased to Sgd2.9bn, 1.69bn shares were sold for as engines of development and It is helpful to look back at comprising fi rms with more Sgd4.2bn. This catalysed the economic growth over the past Singapore’s fi rst steps into than 490 subsidiaries. development of Singapore’s 50 years. the world of sovereign funds. This focus on strategic capital markets. The IPO In 1965, Singapore’s GDP per Following independence in investments and promotion of turned into an opportunity for capita was just $500, on par with 1965, the country faced an government-linked companies Singaporeans to benefi t from that of Mexico and South Africa. unemployment rate of around paid off. In 1999, 25 years the country’s economic growth In 2017, it was more than 100- 10%, as well as a severe lack of after its inception, Temasek when the government announced fold higher, at $56,000. capital and infrastructure. To managed a portfolio worth a 45% discount on shares for One of the factors contributing stimulate industrialisation, the Sgd100bn, almost 300 times its citizens. to the Singapore growth story government took participative original value. In comparison, Singapore is not the only Asian is the savvy use of limited stakes with foreign investors. It Botswana’s Pula Fund, Africa’s country where a sovereign fund government resources. This was also founded new companies in oldest sovereign fund, fi nanced made a corporate success story. achieved through the creation strategic sectors, such as trade, by revenues from diamond and In Malaysia, Khazanah’s 10-year of effi cient investment vehicles tourism, banking, defence and mineral exports, does not have ‘government-linked company geared towards the nation’s transportation. a clear investment objective. transformation programme’ industrial policy and economic As the scale and scope of The fund has grown at a much led to the tripling of market development objectives. As state-led investments grew, the slower pace than its Singaporean capitalisation for the country’s Africa’s own sovereign fund sovereign fund Temasek was counterpart: its assets have 20 largest companies, and 12.6% story unfolds, the examples set founded in 1974 to manage the reached $5.7bn today from growth in shareholder returns. by Asian countries can serve as government’s investments better. $2.4bn in 1999 (the earliest inspiration for reform. Its original Sgd354m (around available measure). Meritocracy and Africa’s sovereign funds $250m) portfolio included 35 Investment in local projects transparency have assets under management inherited government-linked and companies brought Temasek African governments exceeding $160bn. Apart from companies, including Singapore where it is today, with a domestic traditionally have majority Botswana’s Pula Fund, founded Airlines and the Development and global portfolio worth stakes in national assets in the in 1994, all were formed in the Bank of Singapore. Sgd308bn. More importantly, it mining, telecommunications, 21st century. Pundits estimate Its initial goal was to free helped Singapore become more oil, gas and infrastructure that their numbers will reach 20 the ministry of fi nance from investable. For example, through sectors. This puts them in the in the next three years, up from having to oversee government Singapore Airlines, the country best position to create future 12 today. The latest addition is investments, allowing it to bolstered its national branding economic champions. Egypt’s $11bn sovereign fund. focus on its core policy-making and tourism industry. But Asia is proof that you do Their mandate is clear: to activities. By the turn of the Stakes in the Port of not need natural resources to safeguard today’s wealth for 1970s, Temasek took on a more Singapore Authority and create a successful sovereign future generations. But their commercial and entrepreneurial national trading company fund. Those of China, Singapore, relevance has been questioned. role as an engine of economic Intraco allowed Singapore, as Hong Kong, South Korea and To create value, sovereign funds growth. an export-orientated economy, Malaysia are among the 20
32 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_032_Tan.indd 32 10/01/2019 14:46 ‘Asia is proof that you do not need natural appointing external industry out as a leading example of an resources to create a successful sovereign experts instead of government African fund with an ‘innovative officials to grow portfolio sovereign wealth fund structure’ fund. Those of China, Singapore, Hong Kong, companies into internationally that ring-fences its operations South Korea and Malaysia are among the 20 competitive firms proved and capital in accordance to largest sovereign funds in the world, and none efficient. It also facilitated different policy objectives, are funded by commodities. ’ Temasek’s outward opening; including savings, stabilisation today, only 27% of the fund’s and development. portfolio is made of Singaporean Being new to the global largest sovereign funds in the dividend income of Sgd7bn over investments. sovereign fund scene has its world, and none is funded by the last decade. Some African sovereign challenges. It will take time for commodities. In fact, according But what makes the biggest funds are already following this each African country to find to the Peterson Institute for difference in how the funds lead. The Nigeria Sovereign what works and what doesn’t. International Economics, work and are perceived is their Investment Authority has But Africa can draw from Asia’s around 20% of all countries relative independence from their won plaudits for prioritising extensive experience in this field, with sovereign funds finance governments. The increasing its governance structure and so that it too can build sovereign them from sources other than prominence of sovereign funds transparency over financial funds to help create enduring earnings from the export of in Asia over the past 20 years performance. It is the top- growth on the continent. natural resources or from foreign led to concerns about their role ranked African country in the Kelvin Tan is the Secretary- exchange reserves. and impact. Some feared that Linaburg-Maduell transparency General of the Africa Whether or not commodities political agendas could drive index, and was hailed in the Southeast Asia Chamber of are part of the mix, pooling their activities. International Forum of Sovereign Commerce, and founder of together state assets around a Singapore’s arm’s-length and Wealth Funds’ most recent Singapore-headquartered consolidated holding vehicle meritocracy-based approach in annual review. It was marked Core Advisory. allows for more efficient capital raising and a stronger balance sheet base. Because of its ‘high Singapore s gro th supported by the e cient use of government resources GDP per capita, $ degree of investment diversity and liquidity’ and its ‘above 60,000 Temasek AUM = Sgd308bn average consolidated financial 50,000 profile’, Temasek was able to enjoy a triple-A rating for its 40,000 Temasek AUM = maiden Sgd5bn 10-year bond Sgd100bn issuance in September 2005. 30,000 This structure also brings Temasek AUM = 20,000 several fiscal benefits. As a Sgd2.9bn private company, Temasek pays 10,000 Temasek AUM = Sgd354m taxes, and its sole shareholder is the ministry of finance, meaning 0 that returns can be used as a fiscal cushion when Singapore 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Botswana Hong Kong South Korea faces budget deficits. The state Singapore Sub-Saharan Africa South Africa investment holding company Source: World bank data, OMFIF analysis returned an average annual
OMFIF.ORG JANUARY 2019 BULLETIN 33
BTN_01.19_032_Tan.indd 33 10/01/2019 14:46 Digital economy
New architecture of payments systems Distributed ledger technology warrants real-life application
John Velissarios and future-proof payments systems. transactions to be conducted effi cient information sharing Ousmène Mandeng The question is whether DLT with fi nality. In the public sector, while preserving data integrity. Accenture is superior to existing systems the adoption of central bank It is designed to transfer and at reducing residual frictions, digital currencies is an essential record ownership of tokens costs and risks and whether catalyst to offer certainty in instantaneously, immutably and istributed ledger technology the technology can adapt tokenised exchanges and a securely. Dhas made signifi cant to emerging requirements. necessary condition to advance The existing institutional advances over recent years, Moreover, some pundits wonder tokenisation of assets. and legal arrangements are affi rming arguments that it is whether DLT pilot projects DLT addresses residual in large part endogenous to now beginning to challenge have had enough success to concerns about scalability and the technology of the market existing payments systems. warrant application to real-life interoperability. In October 201 , structure. Any signifi cant change DLT addresses ineffi ciencies situations. To all these, the the New York-headquartered in technology may therefore and resiliency while allowing answer is increasingly Yes. Depository Trust and Clearing require new institutional interoperability with existing Corporation showed that DLT and legal arrangements. The and future payments systems. Essential catalysts can support peak trading adaptability and fl exibility of The case to implement this DLT rests on the decentralisation volumes in US equity markets. DLT implies that such changes technology is among the of exchange, removes single The third of phase of Project can be gradual. strongest in cross-border points of failure and can Jasper – an initiative run DLT is set to alter the payments, post-trade clearing streamline existing market by Accenture, the Bank of architecture of payments and securities settlement. structure by collapsing layers Canada, Payments Canada, systems. Recent technological Today, payments systems of interactions that impose DLT company R3 and TMX, the advances demonstrate that it is must address stricter regulation, undue risks, frictions and parent company Toronto Stock ready to be deployed in real-life liquidity and end-to-end risk costs. Through these steps, the Exchange – proved that DLT scenarios. Concerns about the management than ever before technology makes payments platforms can achieve settlement lack of maturity or scalability while preserving privacy, systems more effi cient and fi nality while addressing of the technology have been speed and scalability. Systems resilient while making access necessary scalability and privacy progressively assuaged and likewise have to accommodate more equitable and reducing criteria. should no longer restrict DLT an increasingly compressed operational and fi nancial Accenture was able to adoption. securities life cycle, delivery ineffi ciencies. synchronise business processes The technology is part of a v. payment and settlement in DLT relies on tokenisation of across blockchain platforms longer-term vision to promote central bank money. They must assets and currencies, by which from different technology increasing tokenisation of assets also be able to adapt quickly all properties to allow an asset providers, offering corporations and currencies and offers the to ensure new technologies or currency to be transferred are the possibility to operate in a best technology to achieve that can be integrated or allow recorded with the token. The broader system not bound by a goal. More importantly, DLT interoperability to address a combination of decentralisation specifi c DLT platform. can support broader objectives rapidly changing payments and tokenisation offers the of improved fi nancial integrity, landscape. possibility to achieve true Altered architecture equity, integration, resilience Existing systems for large- delivery v. payment in peer-to- The superior data-sharing and transparency in payments. value transactions are based peer transactions. These are properties of DLT mean John Velissarios is Accenture’s on real-time gross settlement the forebears of a faster, more regulators can impose strict Global Blockchain Technology systems introduced in the effi cient and more accessible access and editing controls to & Security Lead, and Ousmène 1990s. Many are in need of payments infrastructure. safeguard privacy standards. Mandeng is Senior Adviser to modernisation. But some critics The tokenisation of currency Compared with current Accenture’s Global Blockchain doubt if DLT will be able to plays a special role to allow technologies, DLT enables more Technology.
34 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_034_Mangdeng.indd 34 10/01/2019 14:46 Gold
Central bank gold buying soars Trade wars, sanctions fears drive countries’ purchases
Shaokai Fan But the factors threatening to 201 , central bankers’ greatest central bank increased gold World Gold undermine these principles concerns about the global reserves tenfold after years of Council are intensifying, from specifi c economy centre on trade wars inactivity. It also said gold acts issues such as macroeconomic and political developments in ‘as a major line of defence under conditions, fi nancial sanctions, Europe and the US. extreme market conditions or in escalating trade wars and In early 201 the Cboe times of structural changes in the entral bank gold buying political uncertainty, to a volatility index jumped to its international fi nancial system or Cintensifi ed in 201 , with potential structural shift in the highest level since mid 201 , deep geopolitical crises’. While more countries buying more international fi nancial system. highlighting investor disquiet. extreme market conditions and gold, and for a greater variety of Such concern may be specifi cally deep geopolitical crises are reasons. Net purchases totalled Safety in diversity focused on the deteriorating nothing new to fi nancial markets, 3 1. tonnes in the fi rst three For Russia, the largest and most long term fi scal outlook in the nascent structural changes quarters of 201 , up 1 from consistent buyer of gold, the key US, Japan and Italy, coupled with are more unusual. Yet they are 201 and the strongest showing issue is undoubtedly safety – the uncertainty around Britain’s beginning to preoccupy investors, since 201 . Momentum is specifi cally its desire for assets exit from the European Union. especially given the emergence growing, with net purchases of that are free from political risk. These factors could all make of the Chinese renminbi on the 14 .4 tonnes in the third quarter Russia’s enormous accumulation advanced economy sovereign international stage. alone, up 22 from the previous of gold is in direct response to debt less attractive. A report by the Reserve year. pressure from fi nancial sanctions At the same time, central Bank of Australia noted that ‘if As buying patterns change, imposed by the West. Gold has banks may be evaluating the China continues to gradually so are the numbers of central become a strategically important need for greater downside open the capital account and banks entering the market. asset because, as Dmitry Tulin, protection, as they explore move towards a more fl exible Historically, countries such as fi rst deputy governor of the riskier asset classes. According exchange rate, the next phase of Russia, Kazakhstan and Turkey Central Bank of Russia, said in to the UBS survey and a global internationalisation could see were among the most consistent May 201 , it is a ‘100 guarantee sovereign asset management the renminbi emerge as a widely buyers, making regular monthly from legal and political risks’. The study from Invesco, for example, used regional currency in Asia.’ purchases. In 201 , previously substantial increase in reserve managers are moving As renminbi allocations grow inactive central banks, including Russian gold holdings has into untapped markets, such as over time, there is the potential those of Poland, Hungary and been accompanied by an equities, corporate debt and real for a longterm, structural shift India, have also been buying gold. equally substantial decrease estate. Adding gold can act as towards a multicurrency system, Traditionally, central bank in the country’s holdings of US a counterbalance against these rather than the current system reserve managers prioritise safety Treasuries, refl ecting the Russian investments, as it is almost revolving around the dollar. and liquidity when investing. central bank’s long-standing completely uncorrelated to Such a shift would This is why gold, the ultimate policy of de-dollarisation. alternative assets. undoubtedly be destabilising. safe haven asset, has long been Market participants suggest According to World Gold a mainstay for central bank that other central banks, such Structural shifts Council research, it may lead reserve investment. However, as Narodowy Bank Polski, Against this backdrop, some some central banks to purchase as noted in a recent OMFIF have returned to gold after central banks, such as Magyar gold as a hedge in anticipation report, the ‘list of reasons to hold long periods of absence for Nemzeti Bank, are looking to of resultant market volatility. [foreign exchange] reserves has diversifi cation purposes, fuelled gold for long-term ‘stability Perhaps Hungary’s statement is lengthened continually’. The by worries over global political objectives’, noting that gold has ‘a evidence that such changes are same can be said for holding gold. and economic uncertainty. confi dence building feature’. closer than expected. Today, safety and liquidity remain According to a reserve manager Hungary’s recent gold purchase Shaokai Fan is a Director at the the priority for reserve managers. survey conducted by UBS in is notable, not just because the World Gold Council.
OMFIF.ORG JANUARY 2019 BULLETIN 35
BTN_01.19_035_Fan.indd 35 10/01/2019 14:47 The OMFIF Podcast Subscribe to the OMFIF podcast for the latest news and insight on fi nancial markets, monetary policy and global investment themes. Published weekly, the podcast features input from a range of academic experts, policy- makers and investment professionals.
Podcasts available include:
Fed talk: Global China: 2018 in review and Outlook for 2019 Future of the renminbi prospects for 2019
Darrell Delamaide, US Steve Tsang, director of Yu Jie, head of China foresight editor at OMFIF and writer hina nsti tute eorge at the London School of or andels la lo al Magnus, independent Economics, joins Mark Sobel, joins Rein de Loor, programmes manager at economist at the University of Oxford China US chairman of OMFIF, and David Marsh, OMFIF, to review economic progress in the Centre, and John Adams, director of China OMFIF chairman. They discuss the events that US during 2018 and assess the prospects inancial er ices oin llie ro es M shaped 2018 as well as risks and prospects for the economy over the coming year. They programmes manager for emerging markets, or Topics include hina relati ons discuss US monetary policy, developments at to discuss the outlook for the Chinese developments on the UK’s withdrawal from the ederal eser e and the glo al fi nancial economy and the renminbi’s future as an the European Union, central bank policy outlook for 2019. internati onal currency di ergence and fi nancial sta ility
Download now from iTunes or omfi f.podbean.com
BTN_01.19_036_podcast advert.indd 36 10/01/2019 14:50 Pensions
Impact investment sector at critical stage IFC Principles to help defi ne impact investment standards
Andy Budden accumulation stage, most Capital Group individuals’ goal is to maximise returns. As they approach retirement, the focus tends to ‘Retirement provisions are be on securing their retirement changing due to shifting uch of the pensions pot. Finally, when they are in demographics and labour Mindustry globally is set up retirement, the emphasis will be to service the pre retirement on receiving consistent, reliable markets. This puts greater ‘accumulation’ phase. owever, sources of income with reduced impetus on the individual the need for advice and market risk compared with the to fund more of their support continues well into the accumulation phase. future retirement income ‘retirement income’ phase. Given these ma or differences Increased life expectancy in goals and risks across and bear more risk in how and a rising older population the life stages, a different those assets are managed.’ mean fi nancial planners must approach is required when it consider a longer time hori on comes to advice for retirement compared with historical income. Personalisation is key, standards. Retirement provisions particularly as advisers would are changing due to shifting be trusted with managing a Meaningful exposure to equities downturns. As market returns demographics and labour much larger proportion of an to achieve higher potential are hard to predict and retirees markets, which present obstacles individual’s wealth over a longer returns is key. As equities are need regular income, it is critical to sustainability. These changes timeframe. more volatile than bonds, actively that proper portfolio structuring put greater impetus on the Sustainable retirement managing this exposure is mitigates sequencing risk as far individual to fund more of their solutions require more than crucial. as possible. future retirement income and income alone to be robust. Investment mistakes are A recommended approach bear more risk in how those Some of the biggest dangers in harder to rectify in retirement to investing in retirement is assets are managed. retirement are referred to as compared with when saving. The one that refl ects the different the unknown risks, such as the problem with market downturns demands that retirement income Sustainable solutions duration of one’s retirement and when taking withdrawals from a presents something that many Today’s generation of retirees ma or life events. portfolio in retirement is that it investment solutions have not view retirement differently than takes much more of an upswing fully recognised. previous ones. Retirement is now Managing downturns to recover. If a strong upturn It is crucial to understand viewed as another opportunity While these risks appear doesn’t restore the portfolio, investor needs from the outset to pursue different life goals. unquantifi able, measures can be subsequent fi xed amount and ensure advice is tailored to Furthermore, retirement is no taken to manage them. Financial withdrawals will represent meet the different needs of the longer a single, discrete event. planners can apply several key a greater percentage of the accumulation and retirement Instead, it is shifting more principles to retirement income remaining portfolio. Often income phases. Actively towards a continuum with investing. this is not sustainable, and the managed, diversifi ed and resilient moving parts. These differences Growth is needed to reduce portfolio begins a downward and portfolios are more likely to mean individuals require greater the likelihood of outliving your potentially irreversible trend. generate superior outcomes for fl exibility to meet their needs. assets. Fixed income alone won’t The pattern of returns, known investors over the long term. Advice models must capture generate the income and growth as sequencing risk, matters in Andy Budden is a Singapore- investor goals in a simple that most investors need for retirement. It can dramatically based Investment Director at and fl exible manner. In the the length of their retirement. alter the impact of market Capital Group.
OMFIF.ORG JANUARY 2019 BULLETIN 37
BTN_01.19_037_Budden.indd 37 10/01/2019 14:51 Inquiry
The numbers The chart
Each month we take a look at a chart from the world’s central banks. This month, central The People’s Bank of China. In response to a slowing economy in the light of falling consumer demand and poor banks in the manufacturing sector performance, the People’s Bank of hina plans to increase liquidity in the fi nancial system through a second reduction in banks’ reserve requirements. spotlight By the end of January, the central bank is set to cut the reserve requirements by another half percentage point for both large and small lenders. The ratio for larger and smaller banks will fall to 13.5% and 11.5%, respectively, the lowest levels since 2007.
The central bank stated the cut will ‘support the real economy and reduce fi nancing costs . It estimates that reducing the amount of cash banks are required to hold will release $116.5bn of liquidity into the fi nancial system, offsetting high demand ahead of the Chinese New Year.
As investor sentiment continues to deteriorate in the region, further easing by the PBoC is likely to occur through 2019.
China reduces required reserves of major banks to 11-year low Reserve requirement ratio of banks in China, % US President Donald Trump attacked the Federal Reserve in December 2018, 23 accusing it of having ‘gone crazy’ by raising interest rates by 2.25 points. He 21 also expressed regret on his choice of Jay 2.25 Powell as its chairman. 19
17
Urjit Patel resigned as governor of the Reserve 15 Bank of India in December 2019, citing ‘personal reasons’. The months prior included a battle with 13 the government over central bank independence 13.5% and who was to blame for a $2bn bank fraud $2BN 11 case at state-owned Punjab National Bank. 11.5% 9
In December 2018 Mervyn King, former Bank of 7 England governor, accused his successor, Mark 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Carney, of being ‘unnecessarily’ drawn into the 2019 politics of the UK’s Brexit deal, and quoted a report Major banks Smaller banks that suggested the cost of leaving the European 10% Union without a deal exceeds 10% of GDP. Source: People’s Bank of China, OMFIF analysis
38 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_038-039_Inquiry.indd 38 10/01/2019 15:23:02 Book review
Euro enters decisive costs and limiting uncertainty euro’s economic credentials $1.15 at the end of 2018, similar decade arising from exchange rate are conventional and at times to when it launched in 1999. A Danae Kyriakopoulou fl uctuations were only secondary overstated. He dismisses the value recent Eurobarometer survey and emerged much later. From of the euro as a ‘vincolo esterno’, by the European Commission the start, the motivation for a an external constraint compelling indicated the common currency ON 1 European single currency was leaders to pursue sound policies. remains popular. And while these January, political. He highlights the problems with achievements mask important the euro Later came the argument a one-size-fi ts-all monetary regional divergences, they are not celebrated that monetary union was policy for countries facing that different to those between its 20th necessary to safeguard peace disparate economic realities, as the poorest and richer states in birthday. in the previously war-torn well as the diffi culties of a fi xed the US’ much longer-established European continent, further strengthening exchange rate system in the face currency union. Central Bank the political incentives for an of divergent shocks. Still, even in this critical President economically fl awed project. Both these concerns are valid volume on the euro, Mody Mario Draghi once said the single Mody is particularly critical of and important, but are becoming acknowledges many of the currency is ‘like a bumblebee, German Chancellor Helmut Kohl, less so in an increasingly euro area’s weaknesses have a mystery of nature because it referring to the single currency intertwined and globalised little to do with the common shouldn’t fl y, but it does.’ Ashoka as ‘Kohl’s euro’. In a particularly economy. This is demonstrated currency and more to do with Mody, a former International virulent passage, he accuses Kohl by the continued occurrence of fi scal policies, productivity and Monetary Fund offi cial and of having ‘legitimised the use crises even in countries with underinvestment. He proposes visiting professor at Princeton of rhetoric and groupthink as a fl oating rates and the ability to shifting pro-European thinking University, takes a different view substitute for real economic and conduct independent monetary away from ever closer integration. in Euro Tragedy: A Drama in Nine political analysis.’ This laid the Acts. For him, the answer is simple foundations of an ill-designed – the euro survives because it currency union and paved the way ‘For Mody, the euro survives because it is is a political project, supported for the fl awed crisis-management a political project, supported artifi cially artifi cially and unsustainably and irresponsible idealism of later despite defying the principles decades. and unsustainably despite defying the of economics. The euro is not a The book features several principles of economics.’ mystery, but a tragedy creeping examples of continued hubris towards its fi nal act. throughout the euro’s short life. ‘Why did Europeans attempt He cites the ECB’s tightening policy. Perhaps more importantly, His alternative vision for more such a venture that carried no policy amid the 2008 fi nancial the premise on which the book fragmentation through a new obvious benefi ts but came with crisis. Mody mentions policy- is based is not uncontroversial. ‘Republic of Letters’ for Europe huge risks?’, Mody wonders. makers ignoring the build-up of While many countries have focused on education and The fi rst act of his thoroughly imbalances and credit bubbles in suffered economically, the euro’s innovation to drive prosperity is researched and detailed historical the euro area’s periphery. He also record is not as bleak as Mody appealing, but not developed fully narrative unfolds in the early writes about the mismanagement claims. As it enters its third in the otherwise comprehensive years of the European Coal and by European institutions and decade, monetary union has tome. For the euro area to fi nd Steel Community and the Treaty the IMF of the Greek debt crisis. grown in membership to include continued success, policy-makers of Rome. It looks at the origins To improve the euro’s design, he 19 countries from the original must address structural issues in of monetary union as a feeble- proposes Greek debt forgiveness, 11. The bloc’s economic clout the region's economy, rather than minded French vision to enable making any new sovereign debt has increased correspondingly, blame the single currency for all of France to gain economic parity to private creditors subject to making the euro area the second- their problems. with West Germany, if only restructuring, and dismantling biggest economy in the world Danae Kyriakopoulou is superfi cially. The much-hailed fi scal stability rules. after the US. The euro’s value Chief Economist and Head of benefi ts of lowering transaction Mody’s criticisms of the against the dollar stood at around Research at OMFIF.
OMFIF.ORG JANUARY 2019 BULLETIN 39
BTN_01.19_038-039_Inquiry.indd 39 10/01/2019 15:23:04 OMFIF Advisers Network
Louis de COUNCIL Montpellier CAPITAL MARKETS MONETARY POLICY State Street Global Advisors George John Adams Iain Begg China Financial Hoguet Meghnad Desai CFA Research London School of Fabrizio Services House of Lords; Foundation Economics chairman, OMFIF Saccomanni LUISS University Advisers
Yaseen Anwar Marek Belka Industrial & Soh Kian Frank Tiong former prime Otaviano Commercial Bank minister of Poland Canuto Scheidig of China DBS Bank World Bank Group DZ BANK
Irena Aslihan Ben Shenglin Asmundson Stuart Harald Gedik Zhejiang University California Mackintosh Benink OYAK Anker Academy of Internet Department Group of Thirty Tilburg University Bank Finance of Finance
Robert Georgina Johnson Gary Smith Baker Paul Newton International London & Oxford Mario Blejer Institute for New Barings Banco Hipotecario Economic Thinking Finance Capital Markets Corporation
Hani Kablawi Xiang Saker Stewart Chairman EMEA and Songzuo Stefan Fleming CEO Global Asset International Nusseibeh Bielmeier Hermes Fund St Antony’s Servicing BNY Mellon Monetary Institute DZ BANK Managers College, University of Oxford
William Keegan Niels Thygesen José Manuel The Observer University of Copenhagen Hans Jukka González- Blommestein Pihlman Vivid Economics Standard Páramo BBVA Chartered Bank Ted Truman John Kornblum Peterson Institute for Noerr Brigitte International Economics Mark Burgess Colin Granville Jamieson Coote Robertson Queen Mary, Bonds SW1 Consulting University of London Norman Marsha Lamont Vande Berg House of Lords Stanford University Michael Cole-Fontayn Fabio Graham Association for Scacciavillani Oman Investment Hacche Financial Markets NIESR Johannes in Europe Fund Kingsley Witteveen Moghalu honorary chairman, Tufts University OMFIF Advisers Lutfey Siddiqi Akinari Horii Thomas Finke National The Canon Barings University of Institute for Global Singapore Studies NETWORK Volker Gao Haihong Bahar Alsharif Frederick Hopson Janusz Reiter Wieland Harold James Institute of World German Council David Badham Matthew Hurn Anthony Robinson Princeton Economics and of Economic University Franco Bassanini Korkmaz Ilkorur Philippe Sachs Politics Experts Eduardo Borensztein Karl Kaiser Nasser Saidi Consuelo Brooke David Kihangire Pedro Schwartz Katarzyna Colin Budd Christian Zajdel- Hemraz Ben Knapen Vilem Semerak Jankee Michael Burda Gärtner Kurowska Ludger Kühnhardt Song Shanshan DZ BANK World Bank formerly Central Shiyin Cai Celeste Cecilia Lo Turco Marina Shargorodska Group Bank of Mauritius David Cameron Bo Lundgren Paola Subacchi Forrest Capie Mariela Mendez David Suratgar Trevor Stefano Carcascio Murade Miguigy Murargy José Alberto Tavares Greetham Pawel Desmond Cecil Moreira Royal London Kowalewski George Milling-Stanley Narodowy Bank Efraim Chalamish Jens Thomsen Asset Winston Moore Management Polski Moorad Choudhry Wilhelm Nölling David Tonge John Chown José Roberto Novaes Jorge Vasconcelos Vladimir Dlouhy de Almeida Gottfried von Bismarck Daniel Hanna Philippe Obindah Gershon Michael Oliver Jack Wigglesworth Standard Lagayette formerly Banque Jonathan Grant Paul Wilson Chartered Bank Francesco Papadia de France Peter Gray Robin Poynder François Heisbourg Poul Nyrup Rasmussen
40 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_040-041_AdvisoryBoard.indd 40 10/01/2019 16:53 OMFIF Advisers Network
MONETARY POLICY INDUSTRY & INVESTMENT POLITICAL ECONOMY
Andrew Antonio Andrew Denis Large Joel Kibazo Armellini Hedge Fund Adonis JK Associates former MacShane Standards Board House of Lords ambassador, Avisa Partners OSCE
Kishore Jean-Claude Frits Gerard Lyons Jürgen Mahbubani Bank of China Bastos de Bolkestein National Krönig formerly European (UK) Morais Die Zeit University of Quantum Global Commission Singapore
Robert Laurens Jan Rakesh Oscar Bischof Brinkhorst David Owen Mohan German-British Lewisohn University of House of Lords Yale University Soditic Forum Leiden
Albert Boyd Vicky Pryce Athanasios Peter Bruce Centre for Orphanides Bressand McCleary Business Day Economics MIT Sloan School European 39 Essex & Business of Management Commission Chambers Research
Luiz Eduardo Nagpurnanand Caroline Melin Jenny Corbett Brian Reading Prabhala International Australia National independent University of Butler Walcot Partners Economic University economist Maryland Synergies
Maria Edoardo Willem Nick Butler Antonieta Del Robert Reviglio King’s College Middelkoop Skidelsky Cassa Depositi e Commodity Tedesco Lins London House of Lords Prestiti Discovery Fund University of São Paulo
Célestin Olivier John Hans Eichel Michael Monga former German Rousseau African Fonds de réserve Campbell minister of Stürmer Campbell Lutyens Development pour les retraites fi nance WELT-Gruppe Bank
Miroslav Danny Quah Mark Crosby Lee Kuan Yew Jonathan Christopher Singer Monash Generali CEE School of Public Fenby Tugendhat University TS Lombard Holding Policy House of Lords
Grant Natalie Jeffry Spencer Takuji Tanaka John West formerly Reserve Dempster Japan Finance Frieden Asian Century World Gold Bank of New Ministry Harvard University Institute Council Zealand
Shumpei Hans Genberg Daniel Elliot Hentov The Seacen State Street William White Takemori Titelman OECD Keio University Centre ECLAC Global Advisors
Makoto Steve Hanke Pasquale Linda Yueh Utsumi The Johns Roel Janssen St Edmund Hall, formerly Japan Hopkins Urselli NRC Handelsblad University of Mazars Finance Ministry University Oxford
Hans-Olaf Yosuke Tarisa Paul van Watanagase Henkel Kawakami formerly Bank of University of Seters formerly Tilburg University Thailand Mannheim Japanese Ministry of Finance
Ernst Welteke Mumtaz Khan Thomas formerly Middle East & Deutsche Asia Capital Kielinger Die Welt Bundesbank Partners
OMFIF.ORG JANUARY 2019 BULLETIN 41
BTN_01.19_040-041_AdvisoryBoard.indd 41 10/01/2019 16:53 Inquiry
Advisers network poll Trade war still likely to deepen, despite truce Deeply rooted issues between China and US hard to repair
This month’s poll focuses on the prospect of further trade place during the running of the poll, in which Washington agreed antagonism between the US and China. Participants were asked: not to impose higher tariffs on Chinese exports in exchange for a ‘Will China and US trade tensions alleviate or escalate in series of wide economic concessions from Beijing. Most answers 2019?’ came before the summit, but those who responded after saw this The majority saw the current trade stand-off as likely to truce as fl imsy, particularly with hina indicating that it is in no continue well into the new year, with 66% agreeing escalation rush to implement the changes. is inevitable. In particular, they agreed that neither the US nor However, 34% of respondents disagreed with this conclusion, China is prepared to back down on key issues like intellectual suggesting that the political and economic pressure of waging a property and security. The G20 summit in Buenos Aires took trade war, on both sides, would force any truce to endure.
Expectations of US-China trade war in 2019, alleviate or escalate, % of respondents Alleviate Escalate 34 66
Trade tensions will ease in 2019, mainly due to the fact Trade tensions between China and the US will that an escalation does not serve any political interests continue escalating into 2019. at this time. In the US, Republicans’ loss of the House Antonio Armellini, former Italian of Representatives in the midterm elections and late- ambassador to Algeria, India and Nepal cycle rate tightening by the Federal Reserve combine to incentivise the White House to please equity markets – which suggests trade de-escalation. Similarly in China, the Cyclical pressures should reduce as US growth slows while the recent growth slowdown to address structural imbalances Chinese economy stabilises. However, deeper issues such as actually offers the opportunity for reform in areas that are intellectual property and security will prove more stubborn to equally conducive to improving trade ties. resolve, even if Trump’s tactics are less sensational. Elliot Hentov, State Street Global Advisors Colin Robertson, SW1 Consulting
42 BULLETIN JANUARY 2019 OMFIF.ORG
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