The IMF estimated the impact of the weakening currencies of developing countries on the dynamics of economies and capital flows

The strengthening of the real effective exchange rate of the US dollar, which was the highest in 20 years last year, exacerbated trade and financial imbalances. Higher trade deficits in developed countries have been financed by capital inflows from emerging markets. The weakening of the currencies of developing countries leads to economic losses: on average, a strengthening of the US dollar by 10% leads to a decrease in the GDP of developing countries by 1.9% in a year, the decline is also expressed in real trade volumes, when imports fall twice as fast as exports, they notice at the IMF.

The 8% real appreciation of the US dollar in 2022 (and the strongest since 2002; by October of last year, the dollar appreciated by up to 14%) put pressure on emerging market currencies, and also led to another reversal of capital flows from emerging markets. markets to developed ones, according to the report on the state of the external sector, published by the International Monetary Fund.

The strengthening of the dollar (following the increase in Fed rates and the development of “risk-phobia” in the markets) leads to an increase in current account imbalances. Last year, the ratio of the sum of surpluses and deficits on them (that is, global volumes of lending and borrowing) to GDP rose for the third year in a row, indicating trade distortions and changes in financial flows – capital inflows from China and commodity exporters helped finance the increase due to rising prices. on energy raw materials and food trade deficit in developed countries. Changes in reserves, on the other hand, did not have a significant impact on these flows, but investments in US assets increased. Countries with growing current account deficits have mostly cut budget spending, and vice versa, IMF data show.

China had the largest current account surplus last year – $402 billion (against $353 billion a year earlier), as well as Russia – $233 billion against $122 billion and Saudi Arabia (from $44 to $151 billion), in 2023 the fund predicts their significant decline. In Germany and Japan, South Korea, the Netherlands, last year the surplus has already shrunk by two or more times, while in Italy and France the current account balance turned out to be negative. The most significant current account deficit remained with the United States – it increased from $846 to $944 billion, as well as the UK ($116 billion against $47 billion).

On average, a strengthening of the US dollar by 10% leads to a decrease in the GDP of developing countries in a year by 1.9%, the decline continues for another two and a half years, the fund estimates. In developed countries, these effects are much less pronounced – the peak of losses of 0.6% of GDP occurs in a quarter, and the influence of a stronger dollar completely disappears in a year. The difference is explained by the fact that in developing countries real volumes of trade decline more significantly – imports fall twice as much as exports, and there is also a decrease in investment.

At the same time, on average, economies with a flexible exchange rate cope better with such shocks (they pass faster due to a stronger weakening of the national currency), and established inflation expectations allow for a more flexible monetary policy, the IMF points out (this means that the monetary authorities can resort to less tightening during a surge in inflation against the backdrop of higher import prices).

In 2023, the fund expects a decrease in imbalances, as well as a decrease in the outflow of capital from emerging markets to developed ones. “The inflation trend is finally changing, although indicators remain at elevated levels, and core inflation (excluding energy and food) is declining slowly,” IMF head Kristalina Georgieva said at the financial G20 in India. The decline in commodity prices is also helping to reduce imbalances – oil began to become cheaper in the second half of 2022, and the price of wheat, according to the World Bank, fell to a minimum in the last two years in June. This situation, however, may change amid the termination of the grain deal, although given the declining volumes of expected Ukrainian exports and the availability of alternative routes, the increase in grain prices is rather speculative.

Tatyana Edovina