Some thoughts from Morgan Stanley’s Manoj Pradham and Rashique Rahman on the latest G20 news.
First, good news:
The G20 Finance Ministers’ summit in Seoul urged countries to “refrain from competitive devaluation” and to use available policies to reduce current account imbalances. This is far from the cooperative solution that many wanted to defuse a potential ‘currency war’ that Brazil’s Finance Minister Mantega warned about just over two weeks ago. Fortunately, what seems to us to be an inappropriate focus on current account balances (particularly surpluses) did not produce any measures to cap these balances by using a rule-based measure.
And the signposts for succes:
How will investors know if the G20’s desire to reduce current account imbalances in a cooperative manner is meeting with success? Possibly the easiest way of measuring any traction on this front is to see how the G20 summit in November treats this issue. An enthusiastic and less worried discussion of current account imbalances, along with favourable comments from the IMF in the run-up to the summit, would suggest a better environment for dealing with these issues. In general, constructive comments from policymakers along with some show of intent to deal with the fundamental issues underlying global imbalances would also be reassuring. On this front, recent conducive comments from US Treasury Secretary Geithner and Brazil Finance Minister Mantega, along with the trend of CNY appreciation against the US dollar, are encouraging, but we think they need to be built upon. Equally importantly, further capital controls (as long as they are not excessive) could pique the attention of the media but will probably not derail the process since the IMF has explicitly endorsed the judicious use of such controls under the right circumstances (see “Capital Inflows: The Role of Controls”, IMF Staff Position Note, February 19, 2010).