The looming threat of global financial crisis

The rising United States (US) interest rates, tanking emerging market currencies and a bitter US-China trade spat could push the world towards its next financial crisis. But still there is time to avert such disaster. The International Monetary Fund (IMF) cautioned at an annual meeting with the World Bank (WB) in Bali that the world economy is still growing but faces an "unprecedented" combination of threats. Among them is the growing protectionism championed by the Trump administration and the intensifying trade-and-currency battle between Washington and Beijing resulting in tit-for-tat tariffs on billions of dollars worth of goods.

The Indonesian President Joko Widodo opening the Bali talks compared the dispute between the world's two biggest economies, the US and China, to the hit television series "Game of Thrones". He said that "Great houses, great families, battle each other fiercely to seize control over the Iron Throne". But confrontation and collision impose a tragic price not only on those who are defeated but also on the winners. And IMF chief Christine Lagarde warned of a "degree of uncertainty that we have not seen before" in international trade. According to the officials at the Bali meet, disaster can still be averted with reassuring talks from the global financial elite that growth remains strong - the IMF projects 3.7 per cent for this year 2018 and the next 2019 - and could yet withstand the risks looming on the horizon.

Despite tensions, the US and Chinese officials in Bali also sounded conciliatory tones. The US Treasury Secretary Steve Mnuchin described the talks "productive" with the Chinese on the Yuan, which Washington had accused Beijing of keeping artificially low to boost exports. And China's central bank governor Yi Gang called for "constructive solutions" to the damaging tiff, but insisted that Beijing was not devaluing its currency to gain trade advantages - a practice the IMF called on members to avoid. But there are also other brewing concerns, including the US Federal Reserve's decision to raise interest rates. This year has already seen three hikes, which experts largely agree are necessary to avoid overheating an economy with strong growth and low employment. That has squeezed emerging markets, which are seeing capital flee towards the US enticed by higher returns, and also threatens developing countries that have large debt burdens denominated in dollars.

The global economy continues to grow but the outlook is now challenging, especially for emerging markets due to the normalisation of the US monetary policy. The US needs to be very mindful that spill over from the effect of their policies is very real for many countries. Still, there is little expectation for now of a change of gear by the Federal Reserve, despite President Donald Trump's vocal criticism of the rate hikes. The emerging markets should prepare for more hikes with measures that could cushion the impact, including flexible exchange rates and careful management of capital movement.

The consensus among central bankers and leading economic officials is that while the next global crisis may not be imminent, now is the time to prepare for it. French central bank governor Francois Villeroy de Galhau told, "Time to repair your roof is when the sun is shining". The current stable global growth was a good moment "to rebuild budget reserves", he said,  that can help reduce country's debt loads. The IMF has also called on central banks to begin "normalising" loose monetary policy that began in response to the last financial crisis a decade ago, to give them more room to manoeuvre in the case of a fresh economic disaster.

The need for a "cushion" in case of disaster has also been exacerbated by the rise of so called "shadow financing", a largely unregulated system that has spread globally, and an alarming expansion of public and private debt to more than double the world's Gross Domestic Product (GDP) last year 2017. Lagarde urged vigilance in Bali, warning against "collective amnesia" about what sparked previous financial crises. Geopolitical tensions combined with increased protectionism produced terrible developments.

Sarwar Md Saifullah Khaled is a retired Professor of Economics, BCS General Education cadre.

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