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Business and Economics > Finance: General

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Cover Departmental Papers
Navigating External Shocks in Southeast Asia's Emerging Markets: Key Lessons and Challenges in Applying the IMF’s Integrated Policy Framework
Corinne C Delechat
,
Umang Rawat
, and
Ara Stepanyan
As relatively small open economies, South-East Asian emerging markets (Indonesia, Malaysia, Philippines and Thailand or ASEAN-4) are highly susceptible to external shocks—both financial and real—that could induce large capital flows and exchange rate volatility that could lead to foreign exchange market dysfunction. With the exception of Bank Negara Malaysia, ASEAN-4 central banks mostly have flexible inflation-targeting frameworks for monetary policy implementation. Their main policy objectives include medium-term price stability, sustainable economic growth, and financial stability. Central Banks in ASEAN-4 economies have been early pilots in the operationalization of the IMF’s Integrated Policy Framework (IPF) in 2022-23, given their experience in using multiple policy tools besides the monetary policy rate, including macroprudential measures, foreign exchange intervention (FXI), and capital flow management measures, to achieve their multiple objectives. They have welcomed the IPF as a systematic, frictions-based approach to analyze the use of these multiple tools to manage trade-offs across policy objectives. This paper takes stock of the experience from these pilots, both from the perspective of country authorities and of IMF country teams. It aims at distilling key lessons, which could be used to inform broader IPF operationalization. The IPF conceptual framework and a related quantitative model were used to assess policy trade-offs in ASEAN-4 in the event of adverse external shocks. These applications reaffirmed the importance of using monetary policy to address persistent inflationary pressures stemming from real shocks and allowing the exchange rate to act as a shock absorber. However, a complementary use of FXI could improve trade-offs between price, financial, and output stability when economies are faced with large and financial shocks that result in abrupt spikes in uncovered interest rate parity premia resulting in inefficiently tight financial conditions that could hurt growth or risking to de-anchor inflation expectations. The IPF pilots also highlighted some challenges faced when operationalizing IPF principles, notably regarding the assessment of frictions and shocks that might justify the use of FXI. In particular, country teams at times lacked sufficient information to adequately assess the extent of frictions. Moreover, the time-varying nature of IPF frictions and the non-linear effects of shocks make it difficult to assess situations when benefits of a complementary use of FXI would overweigh its costs.
Keywords:
ASEAN; foreign- exchange intervention; Inflation targeting; Integrated policy framework; capital flows; IPF pilot; market dysfunction; IMF country team; IPF model; Policy mix; IMF seminar participant; Currency markets; Exchange rates; Inflation; Southeast Asia; Global
Cover Analytical Notes
Guidance Note For Developing Government Local Currency Bond Markets
International Monetary Fund
and
World Bank
This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.
Keywords:
AN; market development; repo market; investor base; reverse repo; government securities; price discovery; banking sector; market-making privilege; market regulation; market fragmentation; repo market development; market infrastructure; Government securities; Securities; Bonds; Securities markets; Government debt management; Global; Africa; East Asia; currency bond markets; IMF expert; government bond market development; bond market reform plans; government debt market; bond market Association; IMF Library; Yield curve; Southeast Asia; Money markets
Cover IMF Working Papers
In Search of the Origin of Original Sin Dissipation
Bada Han
,
Jangyoun Lee
, and
Taehee Oh
In this paper, we examine how, contrary to the ‘original sin’ hypothesis, emerging market economies have gained the ability to borrow abroad in their local currency. We empirically analyze the relationship of various economic variables with local currency debt and identify three crucial conditions for the capacity to borrow in local currency: institutional quality, sufficient depth in the domestic bond market, and adequate performance in inflation targeting. While shares in JPMorgan Government Bond Index-Emerging Markets (GBI-EM) index also appear to be influential, the associations with local currency debt is less clear. We conduct a similar empirical analysis on portfolio equity, which represents a safer form of external liability than foreign currency debt, and verify that the depth of the equity market plays a key role in attracting foreign capital to domestic equity markets. Finally, we propose a simple portfolio model based on the inelastic market hypothesis to explain the positive correlation between capital market depth and the dissipation of original sin, which refers to the presence of more external liability in the form of equity or local currency debt. In essence, our analysis suggests that emerging market economies with reasonably strong fundamentals are not necessarily reliant on foreign currency debt.
Keywords:
Original Sin; Local Currency Debt; Emerging Markets; FX Market liquidity; annex C. optimal portfolio; equity original sin dissipation indices; equity portfolio investment; equilibrium portfolio determination; growth regression; Securities markets; Currency markets; Currencies; Currency crises; Global
Cover IMF Working Papers
ASEAN-5: Further Harnessing the Benefits of Regional Integration amid Fragmentation Risks
Nuri Baek
,
Kaustubh Chahande
,
Kodjovi M. Eklou
,
Mr. Tidiane Kinda
,
Vatsal Nahata
,
Umang Rawat
, and
Ara Stepanyan
The ASEAN-5 region, which comprises Indonesia, Malaysia, the Philippines, Singapore, and Thailand, has benefited substantially from its integration to the world economy, particularly through trade. Rising risks of geoeconomic fragmentation could reverse some gains reaped from globalization over the past decades. In this context, advancing regional integration among ASEAN-5 members has the potential to enhance the region’s resilience against external headwinds. This paper shows that despite sizeable progress, particularly in regional trade integration, there is room to advance financial integration, which also lags trade integration in ASEAN-5. Empirical findings from the paper illustrate that a higher degree of regional financial integration could generate sizeable output gains for the region. Using firm-level data, the paper highlights that digitalization, an area where the region is thriving, can support regional integration by helping firms better integrate into global value chains, with the benefits being stronger for small and medium sized enterprises. The results also suggest that digitalization can help firms move up the value chain through the production of more sophisticated products, often coined as higher export sophistication.
Keywords:
Trade integration; financial integration; digitalization; fragmentation risks; goods export sophistication; firm level result; firm growth; firm Growth; external finance dependence; Financial sector development; Exports; Global; Asia and Pacific
Cover Analytical Notes
Nota de Orientación para Desarollo de mercados de bonos públicos en moneda local
International Monetary Fund
and
World Bank
This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.
Keywords:
AN; market development; repo market; investor base; reverse repo; government securities; price discovery; banking sector; market-making privilege; market regulation; market fragmentation; repo market development; market infrastructure; Government securities; Securities; Bonds; Securities markets; Government debt management; Global; Africa; East Asia; currency bond markets; IMF expert; government bond market development; bond market reform plans; government debt market; bond market Association; IMF Library; Yield curve; Southeast Asia
Cover Analytical Notes
Notes d'orientation pour le développement des marchés d'obligations souveraines en monnaie locale
International Monetary Fund
and
World Bank
This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.
Keywords:
AN; market development; repo market; investor base; reverse repo; government securities; price discovery; banking sector; market-making privilege; market regulation; market fragmentation; repo market development; market infrastructure; Government securities; Securities; Bonds; Securities markets; Government debt management; Global; Africa; East Asia; currency bond markets; IMF expert; government bond market development; bond market reform plans; government debt market; bond market Association; IMF Library; Yield curve; Southeast Asia
Cover IMF Working Papers
Competition, Innovation, and Inclusive Growth
Reda Cherif
and
Fuad Hasanov
We provide an overview of the theories and empricial evidence on the complex relationship among innovation, competition, and inclusive growth. Competition and innovation-led growth are critical to drive productivity gains and support broad-based growth. However, new technologies and trends in market concentration are stifling future innovation while contributing to the marked increase in inequality. Beyond consumer welfare in a narrow market, competition policy should adapt to this new reality by considering the spillover and dynamic effects of market power, especially on firm entry, innovation, and inequality. Innovation policies should tackle not only government failures but also market failures.
Keywords:
Inequality; inclusive growth; competition; market power; innovation; Big Tech; rise of market power; growth policy; firm markup; superstar firm; panel data; Income inequality; Income; Productivity; Sub-Saharan Africa; laggard firm; market concentration; frontier firm; state intervention; firms enter; innovation policy; competition policy; productivity gain
Cover Analytical Notes
Guidance Note For Developing Government Local Currency Bond Markets
International Monetary Fund
and
World Bank
This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.
Keywords:
AN; market development; repo market; investor base; reverse repo; government securities; price discovery; banking sector; market-making privilege; market regulation; market fragmentation; repo market development; market infrastructure; Government securities; Securities; Bonds; Securities markets; Government debt management; Global; Africa; East Asia; currency bond markets; IMF expert; government bond market development; bond market reform plans; government debt market; bond market Association; IMF Library; Yield curve; Southeast Asia
Cover IMF Working Papers
Managing the Impact of Resource Booms on the Real Effective Exchange Rate: The Role of Financial Sector Development
Mr. Johannes Herderschee
and
Ms. Luisa Zanforlin
Whereas most of the literature related to the so-called “resource curse” tends to emphasize on institutional factors and public policies, in this research we focus on the role of the financial sector, which has been surprisingly overlooked. We find that countries that have financial systems with more depth, as well as those that actively manage their central banks’ balance sheets experience less exchange-rate appreciation than countries that do not. We analyze the relationship between these two findings and suggest that they appear to follow separate mechanisms.
Keywords:
Resource-Rich Countries; Financial Development; Monetary Policy; REER appreciation; credit vis-à-vis credit; monetary policy rate; balance sheet management policy; appreciation of the REER; nonrenewable resource wealth; gas resource; Financial sector development; Real effective exchange rates; Natural resources; Sterilization; Financial sector; Asia and Pacific
Cover IMF Staff Country Reports
Indonesia: Selected Issues
International Monetary Fund. Asia and Pacific Dept
Selected Issues
Keywords:
ISCR; CR; government bond bond yield; IMF staff estimate; loan growth; headline CPI inflation; government bond bond market; Sovereign bonds; Bond yields; Bonds; Inflation; Currency swaps; Global; Australia and New Zealand