IMF: Signs of overheating in emerging markets

WASHINGTON Mon Mar 7, 2011 6:53pm EST

WASHINGTON (Reuters) - Emerging market economies that powered the global recovery may be growing too fast for their own good as inflation pressures build, a top International Monetary Fund official said on Monday.

China, Brazil and other fast-growing nations have struggled to contain inflation and control heavy inflows of investment money. Although the IMF has been warning for months of the risks of price pressure, the comments by the Fund's first deputy managing director, John Lipsky, suggested the IMF is growing increasingly concerned.

"For the emerging economies, growing at 6.5 to 7 percent, their margins of excess capacity have been largely used up, and as a result we're starting to see incipient signs of overheating," Lipsky told Reuters Insider in an interview.

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along. With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation.

Rising oil prices have compounded the inflation problem, but Lipsky said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary.

He said until unrest spread to oil-producing Libya, much of the rise in oil prices in late 2010 and early 2011 reflected an improved economic outlook. However, the latest worries about supply disruptions created a "fear factor" that drove oil above $100 a barrel, which if sustained would pose a bigger threat to growth.

Rising food prices are also worrisome, particularly for poorer countries where food consumes a larger percentage of household budgets, he said. The cost of food was one of many reasons behind the recent upheaval in Egypt and Tunisia.

"We have to be concerned even in places where there is no political upheaval," Lipsky said. "The social strains and real difficulties for poor residents in many economies is something that has to be attended to."

WHAT TO DO?

For emerging markets, cooling growth without inflicting too much damage on the global economy will require some delicate maneuvering.

China has made curbing inflation its top policy priority this year. Its finance minister said earlier on Monday China will ensure that spending on social priorities does not fan inflationary fires.

Separately, Zhu Min, special adviser to the IMF's managing director, said China's loan growth was too strong and addressing that was key to safely slowing down the economy.

"It's a fundamental challenge," he said during a presentation to an economists' group meeting in Arlington, Virginia. "So that's a concern, overheating. In China, slowing down economic growth is important."

Brazil and some other emerging markets have increased taxes on foreign investors or raised banks' reserve requirements to try to slow inflows of investment money and ward off inflationary pressures.

Lipsky, however, offered only a lukewarm endorsement of such moves, known as capital controls. He said the measures may be necessary and useful at times, but those cases were "few and far between" and other methods such as adjusting exchange rates and monetary or fiscal policies ought to take precedence.

The IMF is in the midst of its own internal debate over when and how capital controls ought to be used. IMF staff released a paper in January that said the Fund had been "hamstrung" in its efforts to come up with rules to guide countries on implementing controls because its own membership disagreed on what those rules should be.

"Rather than leaving each individual country to decide how it's going to react, it's better to start talking about some potential guidelines or rules of the road, rules of the game, about how best to proceed so that one country, seemingly acting in its own self interest isn't creating problems for the broader global economy or its neighbors," Lipsky said.

(Additional reporting by Pedro Nicolaci da Costa; Writing by Emily Kaiser; Editing by Andrew Hay and Leslie Adler)

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