Geopolitical risk has shifted into higher gear since Marrakech

The world keeps turning, and not for the better

Just two weeks after the International Monetary Fund-World Bank annual meetings in Marrakech, they already seem a distant halcyon memory. The meetings took place against a sombre background, but Morocco’s hosting and arrangements for the meetings were superb and the local populace helpful and friendly.

Geopolitics was a big elephant in the room in Marrakech. Concerns over US-China tensions were prevalent. Russia’s barbaric war against Ukraine continues unabated with increased questions about whether America would continue to muster Congressional support. Officialdom fretted about the costs of fragmentation and reordered supply chains for the global economy.

But while those concerns are intact, another geopolitical risk has raised its head. Fears of escalation after the 7 October attack by Hamas on Israel into a full-blown Middle Eastern conflagration now loom large. If the conflict drags the US into the mix, it could magnify what would be a limited hit to the global economy into a new major shock.

High yields, high uncertainty

Discussions about an anaemic global economy took centre stage in Morocco. The US Federal Reserve and European Central Bank were generally seen as at or very near the end of their rate hiking cycles. Concerns over China’s doldrums were often expressed. Marrakech debates also encompassed the future of the neutral rate of interest (R*) and the term premium amid a push to higher US yields. Europe is simply seen as being in stagnation and garners little attention in the global economic discussion.

Two weeks later, there appears to be greater focus on the US fiscal trajectory. How will the increased quantum of paper be digested by markets? With the 10-year Treasury yield reaching towards 5%, are higher bond market volatility and thinner market liquidity here to stay?

With higher yields seen as tightening financial conditions further and perhaps helping the Fed steer clear of the need for further hikes, greater uncertainty now permeates market expectations that the US will pull off a soft landing. Volatility in oil prices won’t help. There is understandably now even more hand-wringing that something in the financial sector will break given higher rates and languishing economies.

On the plus side, there is incipient hope that China’s economy may be showing signs of stabilisation, despite housing woes and defaults, and bottoming out for the time being.

US political dysfunction also played a major role in the Marrakech discussions. Attendees from outside the US asked whether Donald Trump could actually be the Republican candidate for president and really win again despite the numerous trials. They asked whether the US will avert a government shutdown on 17 November and whether the House Republicans can get their act together. Since Marrakech, the questions have only become louder as the House of Representatives is unable to operate.

Markets lack conviction. US political dysfunction and the adverse fiscal trajectory can only shake trust in American leadership. Yet America’s role in working with the Middle East, while Europe appears on the sidelines, and high yields continue to bring in funds amid a volatile risk-off environment.

Emerging market debt

Among other issues raised in Marrakech, the bag is mixed. Limited gains are being racked up in dealing with low-income country and emerging market debt. Zambia at long last reached a deal with its official creditors, the merits of which will be seen in the future. Sri Lanka struck a surprise deal with China’s Export-Import Bank, but the details and whether they comport with IMF debt sustainability analysis are still being assessed. The path forward is disjointed and it’s not clear whether the progress is sustainable or precedential.

Progress was also made in advancing the multilateral development bank reform agenda for climate finance. While reforms will continue and more funds will be on offer, the amounts are still small in comparison with the world’s rising climate financing needs.

Argentina’s woes and the implications for the IMF were little discussed in Marrakech, as the world anticipated the first round of presidential election voting. With the results now in, they could probably not have been any more dispiriting to the IMF, given its hope that Argentina would finally buckle down on reforms and begin paying down its huge debt to the Fund.

Instead, the IMF faces the choice of working with a party that has historically been antagonistic with a leader who has presided over horrific macro policies and spending sprees that flew in the face of the Fund programme, or somebody untested, eccentric and probably unable to implement desperately needed reforms.

Markets and economists are notoriously bad at factoring in and pricing political risks, even if they are not oblivious to them. They tend to think linearly within confidence bands. If Marrakech was sombre, recent events are potentially even more sobering.

Mark Sobel is US Chair of OMFIF.

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