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Islington Associates Zurich Switzerland: Have a Dollar Problem

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Islington Associates Zurich Switzerland: Have a Dollar Problem

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Islington Associates wealth management Zurich Switzerland thanks "Simon Constable" of Wall Street Journal for reproducing the following article.

Emerging-markets stocks have been pummeled lately, and the strength of the dollar gets much of the blame.

"The dollar remains the single most important consideration for EM [emerging-markets] finances," says a report from debt-ratings company Fitch. In general, a stronger dollar tends to mean lower stock prices in emerging markets.

Following a sustained period of weakness, the U.S. currency began to rally in late January, around the time U.S. Treasury Secretary Steven Mnuchin said the U.S. didn't want a weak dollar. From Jan. 24, the day Mr. Mnuchin spoke, through May 31, the dollar has risen 5.3%, as measured by the trade-weighted dollar index of major currencies.

Over the same period, emerging-markets stocks and funds focused on them have fallen. For instance, Vanguard FTSE Emerging Markets (VWO) exchange-traded fund, which holds a basket of emerging-markets stocks, is down more than 11%.

What is behind the negative correlation between a strong dollar and emerging-markets stocks?

For starters, when the dollar rises, everything that gets priced in other currencies becomes cheaper, including foreign stocks such as those in emerging markets. But that is only part of the story.

Borrowing factor

Many emerging-markets countries borrow in U.S. dollars despite having their own currency for domestic use. "Borrowing in foreign currency on a meaningful scale is almost entirely an EM phenomenon, spurred by the underdevelopment of local capital markets," according to Fitch.

While borrowing that way can be a satisfactory arrangement when exchange rates don't move, it can present problems at other times.

"If the dollar's value increases, then the debt service will increase," says David Ader, chief macro strategist at financial firm Informa Financial Intelligence in Westport, Conn. Put another way, Turkey's bill to pay the interest on the dollar debt will cost more in terms of Turkish lira when the dollar strengthens. That, in turn, can worsen the country's finances and lead to a deteriorating credit rating, further raising borrowing costs.

On a related note, when an emerging market's currency falls in value relative to the dollar, the cost of imports into that country rise. Rising import costs frequently increase a trade deficit (or reduce a trade surplus). And depending on the country, its currency may fall even more when the trade deficit widens.

Also, many emerging-markets economies rely on markets for energy, materials or foods for export earnings, says David Marcus, co-founder and chief investment officer of asset-management firm Evermore Global Advisors. Such countries include Brazil, Russia and Nigeria, all of which export energy.

Inverse relation

The price of all commodities is inversely correlated to the value of the dollar. So, when the dollar rises, there is a tendency for commodities prices to drop. At a minimum, a dollar surge can subdue commodity rallies.

"That creates lots of swings," says Mr. Marcus, referring to how such economies boom or slump according to the vagaries of the commodity markets.

Finally, when the dollar rises in value, investors tend to keep their money in the U.S. or at least in U.S. dollar-denominated investments. "The strength of the dollar is a magnet and brings investors here," Mr. Marcus says. That also means that capital tends to leave emerging markets, sending stocks tumbling as investors sell shares.

Mr. Constable is a writer in Scotland. He can be reached at reports@wsj.com.

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Islington Associates Zurich Switzerland: Have a Dollar Problem

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Islington Associates wealth management Zurich Switzerland thanks "Simon Constable" of Wall Street Journal for reproducing the following article. Emerging-markets stocks have been pummeled lately, and the strength of the dollar gets much of the blame. "The dollar remains the single most important consideration for EM [emerging-markets] finances," says a report from debt-ratings company Fitch.

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Islington Associates Zurich Switzerland: Emerging-Market Angst Pushes Australia Rate Bets Into Distance

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Islington Associates Zurich Switzerland: Emerging-Market Angst Pushes Australia Rate Bets Into Distance

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Islington Associates wealth management Zurich Switzerland thanks "Michael Heath" of Bloomberg for reproducing the following article.

Turmoil in emerging markets, a populist revival in Europe and the White House slapping tariffs on allies are conspiring to push bets on Australia's first interest-rate hike since 2010 even further into the distance.

While economists have mostly abandoned forecasts of a tightening this year amid stagnant real wages and tepid inflation, a worsening global backdrop has sent traders scurrying to push back bets to the second half of 2019. Reserve Bank of Australia Governor Philip Lowe is all but certain to keep the cash rate at a record-low 1.5 percent Tuesday.

"The synchronized global growth concept seems to have some cracks," said Shane Oliver, chief economist at AMP Capital. There are "concerns about the emerging world from rising funding costs associated with the U.S., and a rising U.S. dollar; questions about Europe with the Italian problem; and then trade wars on top of that. All of these things cast a shadow over the global outlook and the market has pushed back rate expectations accordingly."

Even the potential swing factor of the currency hasn't been swinging much since Lowe and his board last met. The Australian dollar has remained in a relatively tight range in recent weeks as the prices of commodities held up. Australia is the world's most China-dependent developed economy and iron ore is the nation's biggest export.

Indeed, rising liquefied natural-gas shipments and a stabilization of resource investment probably helped the economy accelerate in the first three months of the year. Economists predict it grew 0.8 percent from the prior quarter and 2.7 percent from a year earlier, ahead of data Wednesday.

Weak Wages

Forecasts for an RBA rate hike have fallen back as, like much of the developed world, Australian wage growth remains weak and inflation contained. The difference is that Australia's economy is still more than half a percentage point off its estimated full-employment level of 5 percent, while counterparts abroad are at or below theirs.

Global risks aside, economist Stephen Kirchner of the U.S. Studies Centre at the University of Sydney argues the central bank is too obsessed with financial stability risks at home, from high property prices and debt. He thinks there's not enough focus on returning inflation to target.

"Inflation is already in a prolonged undershoot and is expected to remain below the target mid-point over the next few years," he said. "The RBA is hanging its hat on a tighter labor market and wages to drive inflation higher, but it is actually below-target inflation that is contributing to low wages growth through low inflation expectations. The RBA has the relationship between wages and inflation backwards."
- With assistance by Garfield Clinton Reynolds

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Islington Associates Zurich Switzerland: Emerging-Market Angst Pushes Australia Rate Bets Into Distance

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Islington Associates wealth management Zurich Switzerland thanks "Michael Heath" of Bloomberg for reproducing the following article. Turmoil in emerging markets, a populist revival in Europe and the White House slapping tariffs on allies are conspiring to push bets on Australia's first interest-rate hike since 2010 even further into the distance.

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Islington Associates Zurich Switzerland: Tale of two emerging markets: why Indonesia’s prospects look healthier than Turkey’s

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Islington Associates Zurich Switzerland: Tale of two emerging markets: why Indonesia’s prospects look healthier than Turkey’s

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These are challenging times for the world's developing economies. Money has been pouring out of emerging marketsand into the US for the past several weeks as international investors reposition their portfolios in anticipation of a faster pace of interest rate increases by the Federal Reserve. A stronger American economy, attested by an unemployment rate that has just fallen to its lowest level in 18 years amid signs that wage growth is picking up, has fuelled a rally in the dollar and driven up Treasury yields, putting emerging market currencies, bonds and equities under heavy strain.

Countries with large external debts, or which suffer from sizeable macroeconomic imbalances, have been hardest hit. In Asia, Indonesia has come under more pressure than other nations in the region, mainly because of its hefty current account deficit, currently the largest in Asia along with India's, and the nearly 40 per cent share of local currency bonds held by foreign investors.
Indonesia faces up to emerging market turbulence Don't panic: emerging market volatility is not a sign of another 2013 'taper tantrum'
Between January 25 and May 23, the rupiah, Indonesia's currency, fell nearly 7 per cent versus the dollar, the Jakarta Composite Index (the country's main equity gauge) plunged 13 per cent, while the yield on Indonesia's benchmark 10-year domestic bond shot up almost 150 basis points.

Much of the credit for this belongs to Perry Warjiyo, Indonesia's new central bank governor, who only took office on May 24

Yet over the past 10 days or so, investor sentiment has improved markedly, with the rupiah gaining more than 2 per cent and the 10-year yield down 60 basis points. Moreover, this comes at a time when emerging market bond and equity funds are still suffering net outflows, according to data from JPMorgan, and when the dollar index, a gauge of the greenback's performance against a basket of other major currencies, is close to its highest level since last November.

Much of the credit for this belongs to Perry Warjiyo, Indonesia's new central bank governor, who only took office on May 24. After an interest rate hike under his predecessor failed to reduce the selling pressure, Warjiyo, who pledged to take "pre-emptive" action to shore up the rupiah and ensure that the central bank gets "ahead of the curve", held an unscheduled policy meeting last Wednesday, at which the main rate was lifted by a further 25 basis points, to 4.75 per cent. What is more, the new governor hinted at further tightening, depending on how market conditions evolve and how aggressive the Fed is in raising rates.
Emerging markets paying the price of skittish bond investors This time, Asia's emerging economies will survive the sell-off storm
The credibility of Indonesian monetary policy is further enhanced by the fact that financial stability is being prioritised over growth just months before a presidential and parliamentary election campaign gets under way and has the backing of the country's respected finance minister, Sri Mulyani Indrawati.

Indonesia's resolve to preserve financial stability ... shows Southeast Asia's largest economy has heeded the lessons of 2013

The emphasis placed on defending the rupiah will help guard against a spike in inflation, currently under control at 3.4 per cent. As a net oil importer, Indonesia is threatened by this year's sharp recovery in oil prices which risks causing a further deterioration in the country's trade deficit - already at its widest level since 2014 - thereby increasing the nation's reliance on foreign capital.

Indonesia's resolve to preserve financial stability during a period of intense pressure on emerging markets shows Southeast Asia's largest economy has heeded the lessons of 2013 when it was singled out by Morgan Stanley as part of the "fragile five" group of developing nations that were at risk partly due to their large current account deficits. Another member of the club was Turkey which, unlike Indonesia, has failed to mend its ways over the past five years.

While Indonesia's current account shortfall is expected to stand at some 2 per cent of GDP by the end of this year - down from more than 3 per cent in 2013 - Turkey's will be around 5.5 per cent, according to the International Monetary Fund. More worryingly, Turkey's central bank has fallen way behind the curve, letting inflation surge to nearly 11 per cent - more than twice the central bank's target - and losing the confidence of markets because of vociferous opposition to higher interest rates from the country's autocratic president, Recep Tayyip Erdogan.
Why investors are unfazed by political uncertainty in Malaysia and Turkey
While sentiment towards Indonesia is improving, investors have lost faith in Turkey. The lira, Turkey's currency, has plunged 22 per cent against the dollar since early March while the yield on the country's 10-year local bonds has shot up 270 basis points.

Still, Indonesia is not yet out of the woods. Pressure on the rupiah could easily resume if the rally in the dollar gains further momentum, forcing the central bank to hike rates further and endangering growth.

Yet with Warjiyo at the helm, there is little risk of a Turkish-style rout.
Nicholas Spiro is a partner at Lauressa Advisory

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Islington Associates Zurich Switzerland: Tale of two emerging markets: why Indonesia's prospects look healthier than Turkey's

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These are challenging times for the world's developing economies. Money has been pouring out of emerging marketsand into the US for the past several weeks as international investors reposition their portfolios in anticipation of a faster pace of interest rate increases by the Federal Reserve.

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Islington Associates Zurich Switzerland: Emerging-Market Currency Fears Aren’t Wrong, Just Misplaced

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Islington Associates Zurich Switzerland: Emerging-Market Currency Fears Aren’t Wrong, Just Misplaced

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Islington Associates wealth management Zurich Switzerland thanks "Nir Kaissar" of Bloomberg for reproducing the following article.

Short-term volatility doesn't have a lasting effect on portfolios.

Take the long view.
Photographer: Sanjit Das/Bloomberg

There's a reason to worry about emerging-market currencies, but not the one investors have in mind.

Some developing countries are stumbling, and their currencies aren't taking it well. Turkey's lira is down 16 percent against the dollar since its peak on Feb. 1 through Wednesday, and Brazil's real is also down 16 percent since Jan. 24.

The declines have recently spread to other EM currencies. The MSCI Emerging Markets Currency Index - a basket of currencies that tracks the country allocations in the MSCI Emerging Markets Index - is down 3.5 percent since its peak on April 3 through Wednesday.

Investors didn't need more reasons to fear the swings in EM currencies. Mark Haefele, the global chief investment officer for UBS Group AG's wealth-management unit, summed up the conventional wisdom recently, telling Bloomberg TV that "there's so much volatility in these EM currencies that global investors are taking a pause."

Investors' concerns are misplaced, however, because there's little evidence that the volatility of EM currencies has a meaningful impact on their portfolios.

Most investors are exposed to foreign currencies through investments in overseas stocks. One way to gauge the volatility of those currencies is to compare the return from overseas stocks in dollars - which is subject to currency fluctuations - with the return in local currency - which isn't.

Consider that the standard deviation of the EM index has been 21.4 percent in local currency from 1988 through April - the longest period for which numbers are available - compared with 22.6 percent in dollars, or 6 percent more volatile. In other words, EM currencies have added only modest volatility to the return from emerging-market stocks in dollars.

In fact, the incremental volatility from foreign currencies has been higher in developed markets. The standard deviation of the MSCI EAFE Index - a collection of stocks in developed countries outside the U.S. - has been 14.6 percent in local currency from 1988 through April, compared with 16.7 percent in dollars, or 15 percent more volatile.

Nor is that incremental volatility meaningfully higher during downturns, when investors reputedly flee to the dollar for safety. I counted six episodes since 1988 in which the EM index was down 20 percent or more. The average standard deviation during those periods was 21.6 percent in local currency and 24.1 percent in dollars, or 11 percent higher on average.

Here again, developed-market currencies kicked up more volatility. I counted five drawdowns of 20 percent or more for the EAFE index since 1988. The average standard deviation was 17 percent in local currency and 19.5 percent in dollars, or 15 percent higher on average.

So for most investors, the problem with EM currencies isn't volatility. Instead, the real threat lurks in another conventional wisdom: That currency fluctuations even out over time. It's an appealing assumption, and there's some evidence for it. The EAFE index has returned 3.3 percent annually from 1988 through April in both dollars and local currency.

But that assumption hasn't held up in emerging markets. The EM index has returned 23.6 percent annually in local currency from 1988 through April, but just 8.4 percent in dollars. EM currencies, in other words, have depreciated a lot relative to the dollar over the last three decades.

That's not the only thing that has changed. A growing number of emerging-market stock mutual funds and exchange-traded funds hedge their currency exposure, which means that investors can invest like locals. The only catch is that currency-hedged funds are generally more expensive than unhedged ones.

In hindsight, currency-hedged funds would have been a boon to emerging-market investors had they existed three decades ago. But it's not obvious that the higher cost of hedging will pay off going forward. As my Bloomberg Opinion colleague Robert Burgess pointed out recently, there are good reasons to believe that developing countries are better able to defend their currencies than ever before. And despite all the tumult in places such as Turkey and Brazil, emerging markets are generally more stable and financially savvy than in decades past. All of that should firm up their currencies.

Still, as the frantic warnings about EM currencies pile up, investors should bear in mind that the real gamble isn't the fleeting ups and downs. It's the risk of a slow decline that goes unnoticed until three decades have passed.

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Islington Associates Zurich Switzerland: Emerging-Market Currency Fears Aren't Wrong, Just Misplaced

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Islington Associates wealth management Zurich Switzerland thanks "Nir Kaissar" of Bloomberg for reproducing the following article. Short-term volatility doesn't have a lasting effect on portfolios. There's a reason to worry about emerging-market currencies, but not the one investors have in mind. Some developing countries are stumbling, and their currencies aren't taking it well.

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Islington Associates Zurich Switzerland: Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy

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Islington Associates Zurich Switzerland: Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy

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Islington Associates wealth management Zurich Switzerland thanks "Christine Lagarde" of IMF for reproducing the following article.

Good afternoon-ńgh ōn!

I would like to thank the Asia Global Institute and the University of Hong Kong for welcoming me back to this great city.

Like others, I am always struck by Hong Kong SAR's unique flavor. Think of the incredible ingenuity and energy of its people. And think of their ability not just to adapt to change, but to actively shape their future.

Hong Kong's transformation-from manufacturing powerhouse, to global trade engine, to world-class financial center-reflects its unique commitment to openness, to combining home-grown talent with fresh ideas and expertise from across the world.

Of course, greater economic openness increases one's sensitivity to shifting trends.

Hong Kongers are keenly aware that economic history never moves in a straight line but in cycles. And they know that when the economy is moving-up or down-policymakers cannot afford to stand still.

This is also the story of our global economy.

The world is currently experiencing a strong upswing that holds the promise of higher incomes and living standards. Delivering on this promise is critical, not just here in Asia but around the world.

I have been calling on all governments to use the current growth momentum for much-needed policy actions and reforms, especially in labor markets and service sectors.

In other words, fix the roof while the sun is still shining.

These reforms are often politically difficult, but they are more effective and easier to implement when economies are moving up, not down.

Some governments have taken action, but more needs to be done.

The window of opportunity is open. Yet there is new urgency because uncertainties have significantly increased-from trade tensions, to rising financial and fiscal risks, to more uncertain geopolitics.

How can we sustain the current upswing in the face of these rising risks? And how can we foster long-term growth that benefits all?

These are the issues that Finance Ministers and Central Bank Governors will discuss next week at the IMF and World Bank's Spring Meetings.

And they are the issues that I would like to talk about today.
State of the Global Economy
The good news is that the economic picture is mostly bright-the sun is still shining.

We see global momentum-driven by stronger investment, a rebound in trade, and favorable financial conditions-which is encouraging companies and households to increase their spending.

That is why the IMF in January projected 3.9 percent global growth for 2018 and 2019, and as you will see from our forecast next week, we continue to be optimistic.

Advanced economies are expected to grow above their medium-term potential this year and next. In Europe, for example, the upswing is now more widely spread across the region.

The United States is already at full employment, and growth will likely accelerate further due to expansionary fiscal policy.

Meanwhile, here in Asia the outlook remains bright-which is good for everyone, because this region contributes close to two-thirds of global growth.

Japan's economy continues to grow strongly, and Asian emerging markets-led by China and India-are driven by rising exports and higher domestic consumption.

Challenges remain in some other emerging and developing countries -including in sub-Saharan Africa-though commodity exporters are experiencing a modest upswing.

So yes, the current global picture is bright.

But we can see darker clouds looming.

The reality is that the momentum expected for 2018 and 2019 will eventually slow.

It will slow because of fading fiscal stimulus, including in the U.S. and China; and because of rising interest rates and tighter financial conditions as major central banks normalize monetary policy.

Add to this the issue of aging populations and weak productivity, and you have a challenging medium-term outlook, especially in the advanced world.

What can policymakers do? I see three priorities that can make a difference.
Three Priorities for the Global Economy 1. Steer Clear of Protectionism
First-governments need to steer clear of protectionism in all its forms.

History shows that import restrictions hurt everyone, especially poorer consumers.

Not only do they lead to more expensive products and more limited choices, but they also prevent trade from playing its essential role in boosting productivity and spreading new technologies.[1]

As a result, even protected industries eventually suffer as they become less dynamic than their foreign competitors.

And yet, discussions about trade restrictions are often bound up with the concept of trade deficits and surpluses. Some people argue that these imbalances indicate unfair trade practices.

Yes, there are unfair practices-which must be eliminated-and which can leave their mark on trade balances between two countries.

But in general, these bilateral imbalances are a snapshot of the division of labor across economies, including global value chains.

For example, a country that focuses on assembling smartphones will tend to have bilateral trade deficits with countries that produce the components, and surpluses with countries that buy the finished devices.

More importantly, unfair trade practices have little impact on a country's overall trade deficit with the rest of the world. That imbalance is driven by the fact that a country spends above its income.

The best way to address these macroeconomic imbalances is not to impose tariffs, but to use policies that affect the economy as a whole, such as fiscal tools or structural reforms.

The United States, for example, could help tackle excessive global imbalances by curbing gradually the dynamics of public spending and by increasing revenue-which wouldhelp reduce future fiscal deficits.

Germany, which is facing an aging population, could use its excess savings to boost its growth potential-including through investments in physical and digital infrastructure.

So, what can policymakers do about unfair practices?

Each country has a responsibility to improve the trade system by looking at its own practices and by committing to a level playing field where everyone follows the rules.

This includes better protecting intellectual property, and reducing the distortions of policies that favor state enterprises. It also means trading by the rules-the WTO rules that all 164 members agreed upon.

We can all do more-but we cannot do it alone.

Remember: the multilateral trade system has transformed our world over the past generation. It helped reduce by half the proportion of the global population living in extreme poverty.[2] It has reduced the cost of living, and has created millions of new jobs with higher wages.

But that system of rules and shared responsibility is now in danger of being torn apart. This would be an inexcusable, collective policy failure.

So let us redouble our efforts to reduce trade barriers and resolve disagreements without using exceptional measures.

Let us work together to build on forward-looking trade initiatives, including the recent agreement between Japan and the European Union, the new African Continental Free Trade Area, and the so-called TPP-11.

And let us also ensure that policies help those affected by dislocations, whether from trade or technological advances. Consider the benefits of scaling up investment in training and social safety nets-so that workers can upgrade their skills and transition to higher-quality jobs.

In all these efforts, we at the IMF are supporting our members through analysis and advice and by offering a platform for dialogue and cooperation.

This is what we were set up to do. Our experience over more than seven decades shows that when countries work together, global challenges become more manageable.

We need that spirit of cooperation to avoid protectionism-and to sustain the global upswing.
2. Guard against Fiscal and Financial Risk
We also need to g uard against fiscal and financial risks. This is my second priority.

Here, numbers tell the story.

New IMF analysis[3] shows that, after a decade of easy financial conditions, global debt-both public and private-has reached an all-time high of $164 trillion.

Compared to its 2007 level, this debt is now 40 percent higher, with China alone accounting for just over 40 percent of that increase.

A major driver of this buildup is the private sector, which makes up two thirds of the total debt level. But that is not the whole story.

Public debt in advanced economies is at levels[4] not seen since the Second World War. And if recent trends continue, many low-income countries will face unsustainable debt burdens.

High debt in low-income countries could jeopardize development goals as governments spend more on debt service and less on infrastructure, health, and education.

The bottom line is that high debt burdens have left governments, companies, and households more vulnerable to a sudden tightening of financial conditions. This potential shift could prompt market corrections, debt sustainability concerns, and capital flow reversals in emerging markets.

So, we must use the current window of opportunity to prepare for the challenges ahead.

This is about creating more room to act when the next downturn inevitably comes-or as the economists like to say, it is about "building policy buffers."

What does that mean specifically?

For many economies, it means reducing government deficits, strengthening fiscal frameworks, and placing public debt on a gradual downward path. This should be done in a growth-friendly way through more efficient spending and progressive taxation.

It also calls for more exchange rate flexibility to cope with volatile capital flows, especially in emerging and developing countries.

These efforts help reduce the severity and duration of recessions.

For example, a recent study[5] shows that the decline in output after a financial crisis is less than 1 percent in a country with adequate fiscal and monetary buffers, but almost 10 percent in a country with no buffers.

So, using macroeconomic tools is critical. But it is not enough.

Strengthening financial stability by increasing buffers in corporate and banking sectors is key, especially in large emerging markets such as China and India.

This means reducing corporate debt and bolstering bank capital and liquidity where needed. It also means implementing policies to address booming housing markets, including here in Hong Kong.

New IMF analysis[6] shows that housing markets in major cities across the world are increasingly moving in tandem-which could amplify the financial and macroeconomic shocks coming from any one country.

That is why we need global buffers as well.

For one thing, we must keep our financial systems safe by avoiding a rollback of the regulatory framework put in place since the global financial crisis to boost capital and liquidity buffers.

And the international regulatory framework needs to keep pace with the rapidly evolving fintech landscape to head off new risks while harnessing the potential.

Most importantly, we want a strong global financial safety net. Here the IMF plays a central role in helping countries to better cope with capital flow volatility in times of distress.

Together these policy actions will help sustain the current upswing.

But it is also essential to foster longer-term growth that is more sustainable and more widely shared. That is my third priority.
3. Foster Long-term Growth that Benefits Everyone
Fostering stronger and more inclusive growth is a key challenge.

If, as projected, advanced economies return to disappointing medium-term growth, this would worsen economic inequality, debt concerns, and political polarization.

At the same time, more than 40 emerging and developing countries are projected to grow more slowly in per capita terms than advanced economies.

This means slower improvements in living standards and a widening income gap between those countries and the advanced world.

As I said earlier, the window of opportunity is open. But to boost productivity and potential growth, countries need to step up economic reforms and policy actions.

Let me touch on two potential game-changers:

(i) First, unlock the potential of the service sector, especially in developing economies.

In moving from an agriculture-based to a service-based economy, many of these countries are bypassing a traditional industrialization phase.

This raises concerns that countries could get stuck at lower-productivity levels, with little chance of catching up to advanced economy incomes.

Our latest research[7] shows, however, that some service sectors-led by transportation, communications, and business services-can match the productivity levels of manufacturing.

This is critical for countries such as the Philippines, Colombia, and Ghana where employment and output are shifting from agricultural production to higher-value services.

It is also important for the economic wellbeing of millions of women, who often account for the majority of service industry workers.

Unlocking this potential is not an easy task. It requires more public investment in education, training, and job-search assistance. It also means opening service sectors to more competition.

At the global level, there is work to be done as well. We need to increase trade in services, including e-commerce, by reducing barriers in this area-which are still extremely high.

(ii) The second potential game-changer is the digital transformation of government.[8]

When it comes to cutting-edge technologies and systems, public sectors can lead the way-and we are seeing great examples here in Asia:

In India, citizens receive subsidies and welfare payments directly into their bank accounts, which are linked to unique biometric identifiers.

In Australia, tax authorities collect information on wages in real time, which gives them immediate insight into the state of the economy.

And here in Hong Kong, bank customers will soon be able to use their mobile phone numbers and email addresses to transfer money or make retail purchases, thanks to a new, government-funded payment system.[9]

These initiatives are just the beginning. Governments across the world are now also looking at ways of generating efficiency gains.

For example, one recent study[10] estimates that almost 20 percent of public revenues worldwide, or about $5 trillion, go missing each year, because of tax noncompliance and misdirected government payments.

By using new tools-such as big data analysis-governments can reduce these leakages, which are often directly related to corruption and tax evasion. Reducing leakages would enable countries to increase priority spending.

The bottom line is that digital government can deliver public services more efficiently and more effectively, and help improve people's lives.[11]

Think about it: more households in developing countries now have access to digital technology-such as the internet and smartphones-than have access to clean water and secondary education.[12]

What huge potential for digital interaction! But also, what a reminder that we need to leverage technology effectively to make broader development progress.
Conclusion
Let me conclude. This generation of policymakers is facing a stark choice:

They can simply copy the policies of the past, which have delivered mixed results-raising living standards substantially, but leaving too many behind.

Or they can paint a new economic landscape-where open trade is fairer and more collaborative; where financial systems are safer and more supportive of economic growth; and where the digital revolution benefits not just the fortunate few but all people.

As the great artist Henri Matisse once said: " Creativity takes courage."

We certainly need more courage-in the halls of government, in company conference rooms, and in our hearts and minds.

Thank you.

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Islington Associates Zurich Switzerland: Fix the Roof While the Window of Opportunity is Open: Three Priorities for the Global Economy

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Islington Associates wealth management Zurich Switzerland thanks "Christine Lagarde" of IMF for reproducing the following article. Good afternoon-ńgh ōn ! I would like to thank the Asia Global Institute and the University of Hong Kong for welcoming me back to this great city. Like others, I am always struck by Hong Kong SAR's unique flavor.

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Islington Associates Zurich Switzerland: Why the sell-off in emerging markets will only get worse

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Islington Associates Zurich Switzerland: Why the sell-off in emerging markets will only get worse

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Emerging market stocks are sinking, and one portfolio manager is urging more caution.

Chad Morganlander, portfolio manager at Washington Crossing Advisors, told CNBC's " Trading Nation " that emerging markets could fall further. Here's why.

* One large emerging markets-tracking ETF, the EEM, has fallen 1.5 percent this year amid a gradually strengthening U.S. dollar and concerns around trade skirmishes escalating between the U.S. and its trade partners. The ETF is down nearly 11 percent from its year-to-date high hit in late January.

* As China attempts to decelerate its credit growth, the process may have an overall dampening effect on global growth, but particularly across emerging markets.

* The dollar is also a concern in this arena. As the Federal Reserve hikes interest rates going into the rest of the year, "value" firms in the U.S. over growth company will likely benefit, while emerging markets will feel the pain as the dollar gradually grinds higher against foreign currencies.
Bottom line: Emerging markets may feel further pain as the U.S. dollar gains, and it would be prudent to go underweight the asset class, one portfolio manager argues.
About the Author

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Islington Associates Zurich Switzerland: Why the sell-off in emerging markets will only get worse

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Emerging market stocks are sinking, and one portfolio manager is urging more caution. Chad Morganlander, portfolio manager at Washington Crossing Advisors, told CNBC's " Trading Nation " that emerging markets could fall further. Here's why. * One large emerging markets-tracking ETF, the EEM, has fallen 1.5 percent this year amid a gradually strengthening U.S.

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Islington Associates Zurich Switzerland: Emerging Markets Surprise But the Fed Isn’t Blinking: Economy Week

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Islington Associates Zurich Switzerland: Emerging Markets Surprise But the Fed Isn’t Blinking: Economy Week

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India joined the club of emerging market central banks raising interest rates in a surprise shift as the likes of Turkey to Indonesia seek to navigate a rising dollar, bubbling inflation and a slew of political uncertainties.

India joined the club of emerging market central banks raising interest rates in a surprise shift as the likes of Turkey to Indonesia seek to navigate a rising dollar, bubbling inflation and a slew of political uncertainties.

The U.S.-China saga continues as global leaders prepare to meet in Ottawa, and Europe showed more cracks albeit not enough to stop the European Central Bank tilting towards tighter monetary policy.

Here's our weekly wrap of what's going on in the world economy:

Emerging Problems

The global tightening cycle claimed another player, with the Reserve Bank of India unexpectedly raising interest rates for the first time since 2014 just days after the governor publicly pleaded for the Federal Reserve to slow down its hikes. Indonesia's new central bank chief, who increased rates last week in an out-of-cycle meeting, joined him in that call. Turkey also sprung a surprise by boosting its benchmark more than predicted. As investors wonder which country is next, Brazil is wobbling. Drama in Malaysia centered on 1MDB scandal fallout: Bank Negara's governor resigned. Governments across Southeast Asia enacted subsidies and price controls in a bid to tame inflation. Embattled Argentina, whose central bank meets next week, secured a $50 billion stand-by arrangement from the International Monetary Fund as it struggles to regain investor confidence.

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Islington Associates Zurich Switzerland: Emerging Markets Surprise But the Fed Isn't Blinking: Economy Week

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India joined the club of emerging market central banks raising interest rates in a surprise shift as the likes of Turkey to Indonesia seek to navigate a rising dollar, bubbling inflation and a slew of political uncertainties.

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Islington Associates Zurich Switzerland: MSCI Win Bets Make Saudi Stocks Even Pricier Than New Peers

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Islington Associates Zurich Switzerland: MSCI Win Bets Make Saudi Stocks Even Pricier Than New Peers

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Emerging-market investors need increasingly deeper pockets as they prepare to add stocks from the region's largest exchange.

Saudi Arabian shares have climbed 14 percent this year, partly as foreign investors bet the country will win upgrades to emerging-market status, which they expect to trigger billions of dollars of inflows from funds tracking global benchmark indexes. The buying has pushed the capitalization of Riyadh's market beyond that of South Africa in dollar terms for the first time in 11 months. As the gains pile up, Saudi stocks have become increasingly more expensive than the group the country is poised to join.

Saudi Arabian shares have historically traded at a premium to the average for emerging markets, with access largely restricted to local investors until three years ago. But Saudi price-to-earnings estimates for the next 12 months are near the widest gap over developing countries since 2015. Index compiler MSCI Inc. will announce a decision on whether to add the kingdom to its emerging-markets indexes on June 20, while FTSE Russell made the call in March and will implement it next year.

"After the recent rally, I'd be cautious on going into Saudi on a broad basis," said Osama Alowedi, head of investment management at GIB Capital LLC in Riyadh. "Valuations are already on the higher side, and growth potential is not so high to justify this. Dispersion in valuations is very high, especially for candidates that are expected to have large inflows from index inclusion, with many of them already trading at high levels."

While expectations around the results of index inclusion are widely positive, the optimism isn't matched in the Saudi economy. Gross domestic product shrank 0.7 percent in 2017, mainly as oil production dropped, while non-oil sectors grew 1 percent, according to the International Monetary Fund. The government is attempting to pare its budget deficit by reshaping one of the world's most-generous welfare systems and is seeking to spur foreign direct investment that last year slumped to a fifth of 2016 levels.

Estimated price-to-earnings ratios for the benchmark Tadawul All Share Index have been above the 50-day average for most of 2018, while the same measure for the MSCI Emerging Markets Index has traded below it. Chemicals and steel manufacturer Saudi Basic Industries Corp. and lender Al Rajhi Bank, which are expected to see the biggest inflows following an MSCI upgrade as they comprise almost a quarter of the local stock gauge, both trade at more expensive levels than emerging-market peers.

"If you think about fundamentals, and you see where the market is trading, investors should be a lot more selective and go for bottom-up names," said Alowedi. He remains bullish about banks, "where valuations are still attractive," and about consumer stocks, set to benefit from a recovery in household spending.

Investors also need confidence that Saudi companies can achieve the ambitious earnings expectations set by analysts, to justify paying current share prices. While analysts have been cutting their average earnings estimate for Saudi companies over the past month, after sending it to a two-year high in early May, it remains higher for the year and that may be too optimistic.

Saudi companies haven't met profit estimates for at least a decade, according to data compiled by Bloomberg. Yet, current projections require a 26 percent jump in earnings by June 2019. The Tadawul All Share Index rose 0.3 percent in Riyadh on Tuesday.

As markets anticipate an MSCI upgrade, "valuations have gone so much ahead of fundamentals,'' Aarthi Chandrasekaran, vice president at Shuaa Capital, said in an interview with Bloomberg TV. "I'm sure there will be a cool-off period post the decision announcement, when valuations will start catching up more with reality on the ground.''

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Islington Associates Zurich Switzerland: MSCI Win Bets Make Saudi Stocks Even Pricier Than New Peers

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Emerging-market investors need increasingly deeper pockets as they prepare to add stocks from the region's largest exchange. Saudi Arabian shares have climbed 14 percent this year, partly as foreign investors bet the country will win upgrades to emerging-market status, which they expect to trigger billions of dollars of inflows from funds tracking global benchmark indexes.

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Islington Associates Zurich Switzerland: Argentine Peso Falls to Record for Second Day After IMF Accord

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Islington Associates Zurich Switzerland: Argentine Peso Falls to Record for Second Day After IMF Accord

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The Argentine peso extended losses Monday, sharply selling off as the trading day came to a close, to lead declines among emerging market currencies battered by a flight to safety.

The currency fell 2.7 percent to 26.00 per dollar in Buenos Aires from 25.31 per dollar Friday. It was the second straight day of losses for the peso since Argentina's government announced that it will receive a $50 billion credit line from the International Monetary Fund, the largest deal in the Fund's history.

Argentina's central bank stopped defending the peso Friday, allowing it to surpass 25 per dollar. After weeks of volatility, it had been defending the peso since May 14 by offering to sell $5 billion at 25 pesos to the dollar. The trade was never executed but kept the currency below that threshold. Now the peso is weakening, despite the wide appraisal by economists and analysts about the robust IMF agreement that's meant to damp investors' concern about Argentina's deficits and debt load.

Emerging market currencies, from Mexico to South Africa to Turkey, weakened Monday. Economists say the lack of central bank intervention, broad pressure on the asset class and longstanding concern about Argentina's fiscal deficit pushed the peso down.
Read more: Argentina Wins $50 Billion in IMF Backing to Bolster Economy
"What happened was a combination of the weakness of emerging market currencies and the macroeconomic vulnerabilities that Argentina has," says Miguel Zielonka, associate director at EconViews, a research group in Buenos Aires. "Argentina is in the weakest position compared to other emerging markets."

At the same time, some investors say the IMF agreement itself is having the opposite effect on the peso, stirring concerns about why Argentina needed so much aid.

"I think that the super-sized IMF package is not settling to markets," says David Tawil, president of Maglan Capital which invests in Argentine debt.

Tawil adds that the package raises questions, such as "Why is so much necessary? Can Argentina comply with the conditions on the loan? Will compliance with the IMF cost the economy more than its gaining from the line of credit?"

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Islington Associates Zurich Switzerland: Argentine Peso Falls to Record for Second Day After IMF Accord

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The Argentine peso extended losses Monday, sharply selling off as the trading day came to a close, to lead declines among emerging market currencies battered by a flight to safety. The currency fell 2.7 percent to 26.00 per dollar in Buenos Aires from 25.31 per dollar Friday.

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Islington Associates Zurich Switzerland: These Five Currencies Are Most Exposed to Emerging-Market Rout

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Islington Associates Zurich Switzerland: These Five Currencies Are Most Exposed to Emerging-Market Rout

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Derivative traders are hedging their bets on five emerging markets where they see the greatest probability of declines in the next month.

The currencies of Turkey, Brazil, Mexico, Russia and South Africa are seeing the world's biggest increases in their implied volatility gauges this quarter, amid the worst period for developing-nation currencies since China's shock devaluation in the third quarter of 2015.

Options traders' expectations for swings in emerging-market currencies have risen to the highest level since March 2017, sending a volatility gauge by JPMorgan Chase & Co. to its worst first half since 2013. Most of the increase has come from currencies in Latin America, Emerging Europe, the Middle East and Africa.

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Islington Associates Zurich Switzerland: These Five Currencies Are Most Exposed to Emerging-Market Rout

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Derivative traders are hedging their bets on five emerging markets where they see the greatest probability of declines in the next month. The currencies of Turkey, Brazil, Mexico, Russia and South Africa are seeing the world's biggest increases in their implied volatility gauges this quarter, amid the worst period for developing-nation currencies since China's shock devaluation in the third quarter of 2015.