Strong Macroeconomic Fundamentals Research Articles

West African Economic and Monetary Union

The WAEMU’s post-Covid-19 recovery has so far withstood the new global and regional shocks, partly owing to supportive fiscal and monetary policies as well as relatively strong macroeconomic fundamentals over the previous decade. Growth prospects remain favorable, reserves—albeit declining—remain adequate, and the financial system appears to be resilient. However, the region faces important challenges associated with rising inflation, limited access to international capital markets, eroding external buffers, and regional security issues, in the presence of elevated global risks.

Uzbekistan’s Development Experiment: An Assessment of Karimov’s Economic Legacy

Uzbekistan’s unique post-independence experiment with development was led by Islam Karimov until his sudden death in September 2016. Despite defying international advice on structural reforms, under Karimov’s rule, Uzbekistan achieved an average annual growth rate of 5% in the period 1996–2016, which was particularly impressive (over 8%) in 2004–2016. Karimov also left behind strong macroeconomic fundamentals for his successor. Since taking over the presidency in December 2016, Shavkat Mirziyoyev has introduced wide-ranging reforms, creating an impression of a de facto start to transition in Uzbekistan. This study analyses Karimov’s economic legacy and assesses whether it has enabled or hindered the developmental targets set by his successor.

Prema-chandra Athukorala Comment on Rethinking “Economic Fundamentals” in an Era of Global Physical Shocks: Insights from the Philippines Experience with COVID-19

Prema-chandra Athukorala Comment on Rethinking “Economic Fundamentals” in an Era of Global Physical Shocks: Insights from the Philippines Experience with COVID-19

Rethinking “Economic Fundamentals” in an Era of Global Physical Shocks: Insights from the Philippines Experience with COVID-19*

AbstractHaving “strong macroeconomic fundamentals,” as the Philippines supposedly did pre-COVID-19, matters much less (if at all), in and of itself, to economic outcomes in the context of a physical shock. Using a model for 21 countries including ASEAN+3, developing East Asia and South Asia, as well as Australia and New Zealand to explain the difference in actual 2019 and forecasted 2020 GDP growth, we find that, ceteris paribus, stronger national capacities to detect and respond to emerging outbreaks (in particular, laboratory capacity) are associated with better short term economic outcomes. For the Philippines, up to 3.6 percentage points in lost GDP growth forecasted in 2020 could have been saved. Our results suggest that a dearth in health system capacity should be prioritized over and above any other type of spending, including traditional stimulus (e.g., large-scale infrastructure) spending. Our results also underscore the need to rethink what is necessary for the stability and resilience of an economy—what are the “economic fundamentals”—in an era of global physical shocks, including those brought about by climate hazards. Given physical shocks, efficient and prepared government institutions matter. A macro economy is not resilient if these are not.

External Private Financing and Domestic Revenue Mobilization

Domestic revenue mobilization (DRM) is essential for low-income and emerging economies to sustainably finance their development needs and has received increasing attention in recent years. Studies have centered on structural factors such as the size and the structure of the economy, and the quality of institutions, notably to account for weaknesses in revenue administrations. Nevertheless, DRM can take time and carry political costs. Raising more financing through donors or private investors may be an easier and more politically palatable way for countries to meet spending needs. Using an impact assessment methodology and panel regressions over a sample of 72 developing countries, we found no evidence that access to bond markets or external commercial loans undermines the countries’ efforts to collect tax revenue. On the contrary, we found that access to markets has a positive impact on domestic revenue mobilization. Plausible explanations are that private financing must be repaid, and strong macroeconomic fundamentals are key for maintaining market access. We have also found that macroeconomic stability and the strength of institutions do matter for domestic revenue mobilization.

Enhancing Resilience to Turbulent Global Financial Markets: An Indonesian Experience

In the empirical literature, large and abrupt declines in capital inflows, or sudden stops, typically hit asset markets and generate output losses in the receiving countries. The significant decrease in capital flows to emerging markets in 2018 is a unique opportunity to test this premise. Using Indonesian data, we found that the sharp decline in capital inflows for over two consecutive quarters in 2018 had an adverse impact on the currency, equities, and bond markets, but no discernible output loss was recorded. Real GDP growth remained resilient throughout 2018 and held broadly steady at around 5 percent in the first quarter of 2019. Furthermore, asset markets rebounded quickly, regaining most of the losses incurred by March 2019. We attribute this resilience to Indonesia’s strong macroeconomic fundamentals and responsive fiscal and monetary policies. We argue that to sustain this resilience in the years to come, complementary structural reforms to boost export-oriented FDI would be needed. The 2020 COVID-19 global pandemic has put the emerging economies to the test again, with a possibly more significant impact. We will revisit our analysis in the future in the aftermath of the pandemic.

External Private Financing and Domestic Revenue Mobilization: A Dilemma?

Domestic revenue mobilization (DRM) is essential for low-income and emerging economies to sustainably finance their development needs and has received increasing attention in recent years. Studies have centered on structural factors such as the size and the structure of the economy, and the quality of institutions, notably to account for weaknesses in revenue administrations. Nevertheless, DRM can take time and carry political costs. Raising more financing through donors or private investors may be an easier and more politically palatable way for countries to meet spending needs. Using an impact assessment methodology and panel regressions over a sample of 72 developing countries, we found no evidence that access to bond markets or external commercial loans undermines the countries' efforts to collect tax revenue. On the contrary, we found that access to markets has a positive impact on domestic revenue mobilization. Plausible explanations are that private financing must be repaid, and strong macroeconomic fundamentals are key for maintaining market access. We have also found that macroeconomic stability and the strength of institutions do matter for domestic revenue mobilization.

Deregulation, efficiency and competition in developing banking markets: Do reforms really work? A case study for Ghana

A key research question that remains largely unanswered especially in the African context is whether the macroeconomic environment and the level of financial development of a country determine the effectiveness of financial reforms. This has important policy implications. We choose Ghana as a case study and carry out an in-depth analysis of its comprehensive set of financial reforms, implemented in the 2000s, which we look at individually. We estimate a stochastic cost frontier to look at efficiency. This is then followed by two different models of competition on the loans market, the main target of the reforms. We find that only the removal of entry restrictions is significant at improving banks efficiency and that private and global foreign, but not regional banks, benefit from it. The results show, however, no improvements in competition, and reveal instead that macroeconomic and institutional weaknesses continue to exert a negative counterbalancing effect. Reforms need to be anchored on stronger macroeconomic fundamentals, institutional initiatives and generally stronger credit environments for their full potential to be revealed in the context of developing financial markets.

Spillovers in Sub-Saharan Africa’s Sovereign Eurobond Yields

ABSTRACT This study investigates the possibility of spillovers among Sub-Saharan African (SSA) eurobonds from January 2015 to June 2017 using secondary market yields. Our results indicate significant contagion effects among these bonds, effects that prove sensitive to major economic events and news announcements. They also suggest that less resilient economies transmit more to and receive less spillovers from their peers. SSA eurobond issuers can therefore increase their influence over the performance of their securities on secondary markets by mitigating their vulnerability to these effects. Besides strong macroeconomic fundamentals, an improvement in transparency and information disclosure is required in order to curb the asymmetry of information underlying investors’ behavior-based spillovers and contagion, which supports to a certain extent the market discipline hypothesis in the case of SSA eurobonds.

Financial Shocks and Corporate Investment in Emerging Markets

AbstractWe examine how cross‐firm and cross‐country heterogeneity shapes the responses of corporate investment in emerging markets to changes in U.S. monetary policy and financial‐market volatility, the latter proxying for uncertainty. We find that in response to increases in U.S monetary policy rates or financial‐market volatility, financially weaker firms reduce investment by more than financially strong firms. We also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty. Finally, we find that stronger macroeconomic fundamentals (lower public debt or higher international reserves) help to buffer corporate investment from increases in U.S. monetary policy rates.

DOMESTIC MACROECONOMIC DRIVERS OF INDUSTRIALIZATION IN NIGERIA: STATUS AND PROSPECTS FROM THE MANUFACTURING SUB-SECTOR

While most advanced economies are in the process of de-industrializing their economies, efforts by successive governments to transform the economy of Nigeria, from a commodity-driven to an industrialized one, has not yielded much fruit despite several industrial policies and reforms. In Nigeria, the problem of industrialization is not the difficulty in attaining economic growth but the predicament of the extent to which attention is paid to infrastructure, human capital, private sector credit, technology, foreign direct investment, domestic price and exchange flexibility as determinants of the manufacturing sub-sector’s utilization capacity rate and its productivity index. Based on the United Nations/World Bank success yardsticks with theoretical framework rooted in the Prebisch-Singer Hypothesis and the endogenous growth model, this study utilizes the K-class estimation procedure on Nigeria’s time series between 1990 and 2016. The result obtained indicate that infrastructural development, appropriate moderate institutional frameworks, bank credit, foreign direct investment, electricity, a stable exchange rate, low inflation and economic diversification are key drivers of industrialization. The findings also confirm that unless the Nigerian economy achieves improved infrastructure delivery and institutional framework as well as stable domestic and currency prices, the efforts towards economic diversification may be counterproductive. It is therefore expedient that Nigeria focuses on building strong macroeconomic fundamentals that would accentuate its take-off to industrialization.

Dynamics Of Private Capital Flows To India: A Structural VAR Approach

India started adopting the policies of liberalization and globalization in 1990s and since then it has attracted large amount of private capital flows. With increased magnitude, private capital flows (such as foreign direct investment and foreign portfolio investment) now constitute an important part of India's balance of payments. While there are potential gains from these inflows, they have also exposed the economy to increased risk of volatility and sudden withdrawal, which has ramifications both for the financial and real sector of the economy. Moreover, there may be other potential costs of large capital inflows for the economy as a whole which include rapid monetary expansion causing inflationary pressure, exchange rate appreciation leading to erosion of competitiveness of domestic goods and services, and widening of current account deficits. This study, therefore, identifies and examines the determinants of private capital flows to India so that policies can be formulated to reduce the associated risks (costs) and make India a more attractive destination to invest. It also divides these determinants into domestic (pull) and external (push) factors in order to ascertain their relative importance in determining private capital flows. For this purpose, the study uses monthly data from 1995 to 2014 and estimates the empirical model based on Structural VAR framework. Under Structural VAR, the study utilizes the innovation accounting analysis (impulse response function and variance decomposition function) to derive the empirical results. The empirical results (through impulse response functions) show that domestic output, domestic stock market performance, domestic fiscal deficit, domestic creditworthiness, exchange rate, foreign interest rate and foreign output are the major determinants of private capital flows to India. The results also show that the domestic interest rate has insignificant impact on private capital flows. Further, the variance decomposition analysis reveals that there is dominance of domestic (pull) factors over external (push) factors in driving private capital flows to India, suggesting that India needs to have strong macroeconomic fundamentals in order to attract and sustain greater private capital flows.

Le Mexique à l’heure des réformes structurelles

En 2013, le Mexique a mis en place un vaste programme de réformes structurelles visant à lever les obstacles qui entravaient la progression de la croissance économique dans des champs aussi variés que l’éducation, les finances publiques, le secteur financier, l’énergie et les télécommunications. Il est ainsi un des rares pays à avoir voté un nombre aussi important de réformes structurelles en si peu de temps et avec un soutien politique large. La réduction des monopoles et organisations oligopolistiques qui généraient des inefficiences, et l’accès favorisé au crédit à un faible coût pour les ménages et entreprises pourraient entraîner une hausse du taux de croissance potentiel de l’économie mexicaine de près d’un point de pourcentage. Si certaines des réformes ont commencé à faire la preuve de leur efficacité, les effets globaux tardent à se manifester. Et cela d’autant plus qu’elles ne se sont pas attelées à l’atténuation de la nature paradoxale d’une économie mexicaine saine, stable, résiliente et très ouverte commercialement, mais faiblement inclusive, informelle et caractérisée par d’importantes inégalités territoriales et de revenus et par une corruption prégnante. Classification JEL : D40, L16, O54.

US investment in global bonds: as the Fed pushes, some EMEs pull

We analyse reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors’ allocations towards emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in emerging market economy (EME) allocations is associated with global ‘push’ factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as less volatile inflation and more positive current account balances.

International Sovereign Bonds by Emerging Markets and Developing Economies: Drivers of Issuance and Spreads

What determines the ability of low-income developing countries to issue bonds in international capital and what explains the spreads on these bonds? This paper examines these questions using a dataset that includes emerging markets and developing economies (EMDEs) that issued sovereign bonds at least once during the period 1995-2013 as well as those that did not. We find that an EMDE is more likely to issue a bond when, in comparison with non-issuing peers, it is larger in economic size, has higher per capita GDP, and has stronger macroeconomic fundamentals and government. Spreads on sovereign bonds are lower for countries with strong external and fiscal positions, as well as robust economic growth and government effectiveness. With regard to global factors, the results show that sovereign bond spreads are reduced in periods of lower market volatility.

International Sovereign Bonds by Emerging Markets and Developing Economies: Drivers of Issuance and Spreads

What determines the ability of low-income developing countries to issue bonds in international capital and what explains the spreads on these bonds? This paper examines these questions using a dataset that includes emerging markets and developing economies (EMDEs) that issued sovereign bonds at least once during the period 1995-2013 as well as those that did not. We find that an EMDE is more likely to issue a bond when, in comparison with non-issuing peers, it is larger in economic size, has higher per capita GDP, and has stronger macroeconomic fundamentals and government. Spreads on sovereign bonds are lower for countries with strong external and fiscal positions, as well as robust economic growth and government effectiveness. With regard to global factors, the results show that sovereign bond spreads are reduced in periods of lower market volatility.

Effectiveness of Capital Outflow Restrictions

This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.

Impact of Fed Tapering Announcements on Emerging Markets

This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Assessing the Causes of Capital Account Liberalization: How Measurement Matters1

Karcher, Sebastian and David A. Steinberg. (2012) Assessing the Causes of Capital Account Liberalization: How Measurement Matters. International Studies Quarterly, doi: 10.1111/isqu.12001 © 2012 International Studies Association Why do countries open their economies to global capital markets? A number of recent articles have found that two types of factors encourage politicians to liberalize their capital accounts: strong macroeconomic fundamentals and political pressure from proponents of open capital markets. However, these conclusions need to be re-evaluated because the most commonly used measure of capital account openness, Chinn and Ito’s (2002) Kaopen index, suffers from systematic measurement error. We modify the Chinn–Ito variable and replicate two studies (Brooks and Kurtz 2007; Chwieroth 2007) to demonstrate that our improved measure overturns some prior findings. Some political variables have stronger effects on capital account policy than previously recognized, while macroeconomic fundamentals are less important than previous research suggests.

GLOBAL FINANCIAL AND ECONOMIC CRISIS: EXPLORING THE RESILIENCE OF THE LEAST DEVELOPED COUNTRIES

AbstractIt is often argued that strong macroeconomic fundamentals along with weak integration with international financial markets acted as major buffers for least developed countries (LDCs) against fallouts of the recent global financial and economic crisis. This paper examines the hypothesis that LDCs had strong macroeconomic fundamentals in the wake of the crisis by studying Impulse Response Functions (IRFs) of Gross Domestic Product per capita of the LDCs during the crisis. With the treatment of the crisis as a transmission of shocks and utilisation of IRFs, the paper finds substantial and rather persistent output and growth loss for LDCs because of fall in external demand and terms of trade shocks. With the forecast of the impacts of a potential ‘double‐dip’ recession on the LDCs by using Vector Autoregressive, the paper concludes that LDCs would require the greater part of the decade to recover which is lower than the earlier recovery period. Copyright © 2012 John Wiley & Sons, Ltd.