Reuters World News - IMF-World Bank meeting: Old problems and new headwinds

Episode Date: October 7, 2023

The IMF-World Bank annual meeting takes place in Marrakech just weeks after a deadly Moroccan earthquake. The setting is apt for emerging markets and defaulting countries that are struggling with headwinds from all sides. Listen to our global financial and economic editors discuss those challenges -- and visit a barber shop in Argentina, where annual inflation is 124%. Learn more about your ad choices. Visit megaphone.fm/adchoices

The International Monetary Fund and World Bank meet in Marrakesh, just weeks after a deadly earthquake raised parts of Morocco. The timing and location are apt. Indeated nations right now are on the pointy end of the higher interest rate stick, and on the front lines of climate change. This weekend, we look at the challenges facing developing nations and emerging markets, from Argentina's inflation nightmare, to North Africa's fight for dollars to clean up disasters and fend off climate change.

All while tensions between the U.S. and China cast a pall over global financing. I'm Christopher Waljasper in Chicago. I'm Adam Jordan in Buenos Aires, Argentina. I'm Mark John in London. I'm Angus McDowell in London. And I'm Alisa Martinelli in Marrakesh, Morocco. We start in Argentina. A country where annual inflation is 124 percent, as

its currency's value plummets. Argentina is also the recipient of the IMF's biggest loan in history. Adam Jordan takes us to a barbershop, where the economic crisis has been well documented. Okay, so this shop is a small, very simple barbershop, a residential part of northern Buenos Aires. You've got two chairs, two different barbers who work there, Ruben Galante and his colleague.

Rubinus had this same place for over 40 years. He rented it in 1982 when he was in his 20s and he bought it a few years later. And he's worked and had his career in this same small store for decades. So actually, I first started going to this barbershop in 2019 when I arrived here in Argentina. Interesting, the same year as this current government in Argentina started. And every time we go, we talk about the economy. We talk about inflation, we talk about how things are going with politics. And one conversation, we were talking about pricing, we were talking about the long history

of prices and inflation and the ebbs and flows of prices in Argentina. And it turned out that Ruben had this amazing trove of notebooks that he'd kept for decades in this meticulous handwritten notebooks of every haircut he'd ever done. Going back to the 1990s, each one jotted down. and you could see the prices and the prices changing over the decades. And there were sometimes when inflation was lower and you could see the prices staying stable for a lot longer. And then suddenly you had these peaks and troughs of when inflation really burnt through.

And in the last 10, 15 years, you've seen inflation really take off. And the number of times that he has been forced to increase and hike his prices has accelerated massively to the point where we've gone from 20, 30 years ago when the price was 15, pesos to now when it's about 2,800. What's happened with this inflation over the years, of course, is that you've had at the same time a steady devaluation of the peso currency. So 15 pesos in 1991, that was worth $15. Every time you cut someone's hair, you were pretty well off.

You could afford to travel, you could afford regular Starbucks coffees, you could afford to go out dining. You were pretty well off at that sort of level of earning. So being a hairdresser in that period, you'd be comfortably middle class and be at a four things. 2,800 pesos now is worth the equivalent of about $3.50 at the exchange rates that you can get on the street here in Argentina. So if you're looking at that, I mean, you've gone from dropping from $15 to $3.50. So, you know, in any country in the world, in the US and the UK, you wouldn't bear to fathom

that sort of change over that sort of period of time. But for here in Argentina, it's becoming something that is sadly too normal. Now that is a key theme playing into the election here this month. What we've seen is that voters say inflation, the economy, are their absolute top concerns, their top worries ahead of the vote. Now, that is driving people towards this unusual outsider radical libertarian candidate, Javier Nilei, who would mark a major shift from the sort of main to traditional political parties. He's offering a completely different and radical view.

His economic plans are very different. He's talking about getting rid of the central bank, moving to the dollar. Socially, he talks about bringing a chainsaw and chainsaw in the status quo, getting rid of the political caste. He's anti-abortion, which is something that Argentina has only recently in the last couple of years approved. And he's offering a very different direction for the country. And at the moment, leading in the polls, and behind that, behind that drive and behind his rise, has been inflation and the anger and the cost of living crisis that it's brought with it.

One of the key things for Argentina to ensure its economic stability and ultimately to bring down inflation is going to be its relationship with the IMF. They are the IMF's biggest creditor worldwide. They have a huge $44 billion loan deal with the fund. Now, that's come under a lot of pressure, a lot of criticism over the years as Argentina has struggled to pay it back. They've had to at different times renegotiate. and change the goals they have with the IMF. But they need that program to survive really to ensure their economic stability, to ensure they've got enough money in the bank to better pay back their creditors,

to better pay trade partners, and to make sure things don't fall apart completely. Now, whoever comes into the next government as the next president is going to have that on their shoulders. My colleague Alisa is the finance editor for Europe, the Middle East and Africa. So Alisa, let's back up a moment. Can you explain the International Monetary Fund? So got to step back to the 1940s. Large parts of the world have suffered from the effects of uneven growth in some of the richer countries. You were entering almost the post-war era.

This is when the IMF was founded. But it is essential that the international monetary system should help rather than hinder them in their efforts. The institutions created at Bretton Woods have proved their worth. Right now it has 190 member countries, and its objectives are really threefold. You're looking at an institution that tracks the economic and trade development around the world, but it also advises governments around the world on navigating the ever-growingly complex global trade and financial markets. But I guess crucially, what it's most known for is being a lender of last resort. It comes in. It helps nations that are not able to raise financing elsewhere and helps it out with access to finance.

It often comes along with requests and strategies to reform the economies. And if you look at it today, it has firepower of around just shy, let's say, of a trillion dollars. And what are they hoping to accomplish in Marrakech? So the IMAT of the World Bank, they meet twice a year. This is the big, annual meeting. And I think it's helpful to set the stage a little bit of where we are today in the global economic and financial context to understand what really might be achieved here. The IMF chief, Kristallina Gorgeva, has spoken of the economy globally now, probably avoiding a recession, but still there being sort of a slowdown and you're looking at a global economy

that's still below the pre-pandemic levels. And you've got fiscal and financial risks that's still abound. It's quite symbolically important where this meeting is taken place because it's happening in Africa for the first time in 50 years. And the objectives really against that context are to try and reconcile some of the fragmentation that you've seen in economies and in geopolitics in the last year or two make progress on the most significantly challenged economies that are in need of restructuring their debt or raising financing, and really get the countries, the member countries that have the deepest pockets to put more on the table as the challenges compound, not least given the increased costs that nations are facing to adapt to climate change and face some of the most extreme

situations from weather and climate that we've seen in recent years. Okay, so we just heard about Argentina's inflation woes. Is what's happening in Argentina unique? I think some of the challenges that Argentina faces are unique to its economy, but some of the underlying pressures, you know, such as very high inflation triggered by the rise in food prices and oil prices in the last couple of years, are challenges that are affecting a number of nations right across the world. And you've also got the compounding effect of a slowdown in China. A China's economic growth, which tends to pull up with it, other parts of Asia. And in this case, that economic engine isn't putting away as faster as it has been. Another economy that people

are watching very closely and closer to Morocco where the meetings are taking place as Egypt, we saw one of the principal rating agencies on just this week downgrade Egypt's credit rating deeper into junk territory. And what that does, it puts more pressure on the cash-strapped nation, just as it's heading into elections in December. The economy is in the middle of a crisis. It has, again, record inflation and, you know, a pile of government debt, which it's struggling to keep up payments on with a plunging, you know, domestic currency. The economic slowdown in China has rippled across the developing world,

where Beijing's Belt and Road initiative has invested billions in infrastructure projects. As China pulls back, it's, investments, the U.S. is trying to reassert its influence. And that's creating tension for other global players that have economic ties to both. Mark John is our European economics editor. Mark, as the U.S. and China grapple for influence in emerging economies, how does the European Union fit in? I think Europe's main concern is that it ends up in what they call a one-world two systems scenario, which is basically that instead of the sort of the free trading world, that they aspire to at the moment. You have this world in which you have, on the one hand,

an American focus block and on the other a China focus block. And then, of course, Europe is in the situation where it has to take sides. And that's something it really does not want to do. And it should be said, the European Union is not a homogenous body. Is there a unified vision of how the EU thinks about economic investment, especially with China? That's the sort of question. that the leaders of Europe are actually grappling with right at this moment. This week they've been meeting in Spain to talk about what they call their economic security package. And one of those things is to try and have a conversation about what sort of investments

can be made in China going forward, what sort of technologies are seen as so either strategic for the economy of Europe or indeed important from a security point of view that they want to start having kind of restrictions on them. I think it's fair to say that the starting point of a number of European countries is different. Germany arguably has much more to lose from this than, say, France, which doesn't have that same degree of trade. So we will see as this process develops, whether that becomes a kind of a dividing line. You bring up a good point that we can't talk about economics without also talking about security. and I think the great example of that is the change in the Russian relationship.

How does the conflict in Ukraine impact the European Union's relationship with global players, including the US and China? Yeah. I mean, I think that the conflict in Ukraine has made Europe realize just how dependent it was on nations which might not prove to be as reliable partners as they once thought for several decades, Europe essentially saw Russia as a potential trading partner. It built up a very heavy energy reliance on Russia. And the Ukraine war has put all of that into question. And I think more widely, it's made it realize that it's not too wise to rely on one or two countries for really

critical things. So it's been the backdrop of this conversation, which is prompting, I think, Europe to look elsewhere and to develop trading relationships. For example, with countries in Latin America, it's looking further afield in Asia as well. So whereas before China might well have been the first and most obvious destination, I think it's also looking at some of these other Asian countries like Vietnam that can actually help it to diversify some of its trading ties and make it less reliant on one country as a whole. And at the end of the day, we like to talk about China's Belt and Road initiative and the U.S.'s approach to the global south, but does the EU have to pick aside? At the moment, no, it doesn't. I think it's starting to,

shall we say, see that as a potential future concern. I think that concern would get a lot more marked depending on the outcome of the U.S. election next year. I think the nightmare scenario for a lot of European capitals would be, for example, the return of Donald Trump to the White House, because then I think that kind of anti-China sentiment would potentially develop into fully-fledged American policy. And this one-world two system scenario that we talked about earlier might then become a reality. And it's at that point that Europe would be forced against its will to make a choice. So is there a possibility that increased American protectionism could actually push the European Union into greater economic relationships with China? I think it's more the

reverse in the sense if you get an America which becomes more protectionist and, for example, does things like impose secondary sanctions on China, which means that European firms would be seen as in breach of those sanctions if they carried on their links with China, then that would be more something that would be pushing Europe closer to America, somewhat against its will. I mean, we're already coming out of a period that's been very bruising in many ways for the transatlantic trade relationship. And in fact, over the next couple of weeks, we will see whether Europe and the United States can find an agreement to remove steel and aluminium tariffs. I think if that deal isn't forthcoming, then that's quite bad news for the US-Europe trading relationship, in fact.

Elisa, how does China's shifting relationship with some of these developing nations play a role in the IMF's thinking? It's interesting because just earlier in the week, the IMF chief, Gilgaveau said that, you know, she'd be open to China having a stronger voice at the IMF with a higher quota, although that doesn't seem to be on the table formally. typically the IMF member countries have so-called quotas based on their position in the world economy, which determines and affects how much they might contribute to the fund, and as well as giving it voting rights.

And at the moment, China's quota is smaller than Japan's, despite clearly there being discrepancy in the sizes of those economies. So how has the global economy shifted since the last IMAO, IMF meeting. Since the last meeting since April, you haven't had a softening of the geopolitical tensions. In fact, you've had a hardening and a deepening of the divisions. You have, for example, groups such as the Bricks, which is, you know, Brazil, Russia, India, China, and South Africa, inviting others to its membership. So creating another geopolitical force with which to contend. So I think what can be achieved, or the IMF would hope to achieve, is to try and get everybody back to the

table, you know, negotiating the situations that are in most distress and trying to find a way forward because the countries that have been seeking to reorganize their finances, what they've been facing in the last couple of years is basically not much progress quickly because there have been just different agendas with the West versus the East. You have the growing world of China and the global economy and China's different approach to how some of these situations need to be resolved, getting in the way of potentially of the speed with which the restructurings are being tackled. And how is the World Bank looking to help with the debt restructuring? Well, one thing that's up for discussion is getting the World Bank to lend more,

basically getting it to do more with its balance sheet. And this is something that's been talked about that could potentially increase the lending capacity by, you know, in excess of $100 billion, $100 billion. And some of this potentially could be funds that could be directed more. specifically towards the climate transition challenge, that is something that doesn't have everybody's buy-in yet. I think some of the developing nations might prefer the World Bank's focus to remain as it is today and focus more on poverty. But when you see that type of figure, you can see the kind of potential that's at stake. How is the economic picture in places like the European Union or the

US impacting the IMS strategy? So we haven't been in an interest rate cycle of the one that we're in now with banks facing the same constraints. So from a financial stability standpoint, there's still quite a lot that I think investors and market participants were still looking at closely in terms of how it plays out. And does that financial uncertainty then ripple into investment decisions in emerging markets? Yes, absolutely. It makes risky assets potentially that's attractive. You have a slowdown now potentially coming in Asia, triggered by the slowdown we've seen in China, and that, of course, will have a knock on effect on the economies of particularly the emerging markets. The IMF meeting comes against a backdrop of devastation

after a 6.8 magnitude earthquake killed nearly 3,000 people in Morocco last month. As our North Africa editor, Angus McDowell lays out, disasters like this are never. becoming a part of the IMF's calculus. Angus, how do natural disasters, like what happened in Libya and Morocco, how do they impact a local economy and its need for global investment? We really saw, with the disasters that hit North Africa last month, the way in which countries that have very different types of government are equipped to deal with disasters of the kind that may become more frequent with climate change,

In Morocco, although the earthquake, of course, was not climate-related, the country has been dealing for many years with a terrible drought, and it recently worked with the IMF to get approval for a $1.3 billion loan under a new IMF scheme to help countries prepare for potential climate disasters. In Libya, by contrast, where the government has been divided and unable to, function properly since 2011. What we really saw in Libya was a horrendous case study of what happens when there's no active government and when climate disasters strike. The horrendous rainfall that happened in Libya was predictable, and yet Libya does not have the sort of weather

forecasting systems that could have delivered the right sort of warnings. There were no clear plans in place for how to deal with that kind of rainfall in a city where there were known problems with the two dams that controlled the watercourse, which brought all of that mountain rainfall down through the center of the city. So how are some of these nations in North Africa or other developing economies preparing for a potential increase in natural disasters? So far, the really big issue is that climate change has. brought into North Africa has been a question of drought. And in a sense, that is also a climate change disaster, even though it's one that happens on a slower clock than the kinds of flash floods that

we saw in Libya. But climate change has also brought one kind of disaster that has increasingly been striking across North Africa, which is wildfires. And wildfires have over the past year torn through both Tunisia and Algeria along their Mediterranean coastlines and have also done so in previous years. It's something that those countries are now starting to see as potential annual events, but I don't think we've really started to see either of them trying to tap international funding sources to help with ways to mitigate the effect. of those wildfires. And in Morocco, Algeria and Tunisia, there have been years and years of drought, which have in the first place greatly decimated the agricultural sectors in each of those countries,

but they have also caused stress for water supply to cities and to industry. And each of those countries are now starting to look at alternative projects for ways that they can supply water. But in each of them, again, we're already seeing measures being taken to ration water use at times. And this, of course, is something that may impact both on the economy, but also on the political difficulties that may result. It strikes me that we often talk about climate migration from the receiving. end, but these are nations that are dealing with the implications of climate change, and it is forcing populations to move, or it's a contributing factor to the movement of people.

How are some of these North African countries thinking about climate change and its populations and migration and attempting to address it? Migration is absolutely part of the climate change question in North Africa. These are countries that not only have many people who themselves are seeking to leave for what they hope will be a better life in Europe, but are also transit countries for many other people who are driven, perhaps by climate change, as well as other issues, to try to cross the Sahara and then eventually the Mediterranean. In Morocco, where drought has really decimated the rural economy for many years, many, many people have relocated to cities. And this, of course, has put tremendous stress on urban areas as it has increased the population of much poorer people in typically very run-down parts of cities. and that in itself has then also caused some political frictions.

So how do these nations grow economically while also facing down this looming threat of climate disaster? One way in which North African countries are starting to approach the climate change issue, both for themselves and as part of their economic relations, with major trading partners in Europe, is that they are increasingly pushing solar energy projects that would both relieve their own need for increasingly expensive oil, but which they also now are hoping to export in the form of electricity

to the European grid. And in Morocco, solar energy is increasingly being used both for Morocco's own electricity production, but also to energise specific projects, including desalination that is intended to feed both farms and coastal cities. While the disasters that have hit North Africa over the past month really point to the risks that climate change and natural disasters can pose for emerging economies, what we're also starting to see as the climate crisis bites is the way in which countries are seeing an opportunity to also turn to, to renewables projects, both for internal use and also as a means of exporting electricity to Europe. That's it for this special edition.

Kim will be back on Monday with our 10-minute daily news show. Special thanks to Elisa Martineuzzi, Adam Jordan, Angus McDowell, Mark John, and all the reporters who make this podcast possible. The show is produced by Jonah Green, Tara Oaks, David Spencer, Kim Vennel and myself. Our senior producer is Carmel Crimmons. Leila Decretzer edits to show. Engineering and sound design by Josh Summer.

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