Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-Christine Lagarde, the Managing Director (MD) of the International Monetary Fund (IMF) Wednesday advised Emerging Markets and Developing Countries to improve their Banking Regulation and Supervision.

Lagarde gave this advice in her speech “The Global Policy Actions Needed to Stay Ahead of the Crisis” at the Economic Club of New York, New York, United States of America (USA).

According to her, Emerging Markets which includes Developing Asia and Sub-Saharan Africa will need to boost their defenses by reconstituting Fiscal Policy space that eroded during the crisis as well as stepping up Banking Regulation and Supervision.

This is coming on the heels of warnings to Emerging Markets and developing countries that Corporations in these areas are taking on more Debt and Foreign Exchange Exposure.

She said over the past five (5) years, Foreign Currency borrowing by Firms in Emerging Markets has risen by about 50 percent (50%), Bank Credit has increased by 13% in Latin America and 11% in Asia.

Lagarde warned that Emerging Markets will need to boost their defenses to include reconstituting Fiscal Policy space that eroded during the crisis as well as stepping up Banking Regulation and Supervision.

She affirmed that the right macroprudential policies clearly depend on different circumstances.

“When the tide turns, and Interest Rates pick up again, these hidden dangers will be exposed to the cold light of day” she said.

Other advice Lagarde gave include limiting credit growth in rapidly-expanding areas, imposing capital requirements that move with the cycle, reinforcing Financial Markets, and closely monitoring Foreign Exchange Exposures.

“The advanced economies also bear some responsibility here, in terms of delivering a better Fiscal Policy and more Financial Repair—and thus relieving some of the burden on Monetary Policy” she affirmed.

Lagarde further affirmed that with the right set of Policies on both sides of the Capital Flow Equation, the risks can be managed—and the Emerging Markets and Developing Countries can expect to continue their forward momentum in the “first speed” group of economies.

“Let me emphasize that, in present circumstances, it makes sense for Monetary Policy to do the heavy lifting in this recovery by remaining accommodative. We know that inflation expectations are well anchored today, giving Central Banks greater leeway to support growth.

But experience also tells us that this can have unintended consequences. Low Interest Rates push people to take on more risk—some of which justified, some of which not” she said.

The IMF MD said across the Emerging Economies, Policymakers worry that exceptionally loose Monetary Policy will affect Exchange Rates, Capital Flows and threaten Financial Stability through high Asset Prices and Rapid Credit growth.

The greatest worry is that just like “what goes up comes down”, “what comes in goes out”—a sudden reversal of large and volatile Capital Flows that can bring down the economy with it.

Right now, these risks appear under control. Capital is flowing to Emerging Markets mainly because of good policies and good prospects in these Markets.