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Growth, risk, vulnerability


5 January 2017, London

Omfif -bulletin -january -2017-1

Last year marked the dress rehearsal for major political and economic shifts. In 2017 the curtain goes up for the real show. The UK vote to leave the European Union, the election of Donald Trump, and Italy’s rejection of constitutional reform proposals were serious disturbances. This year the electorates’ decisions take effect.

Emerging markets could be hit next. Ultra-low rates in advanced economies motivated huge capital inflows into emerging markets. But the Fed is changing course and will raise rates at least three times this year, predicts Darrell Delamaide. This creates vulnerabilities in emerging markets both directly, in terms of capital outflows, and indirectly, through dollar appreciation. China’s slowdown and own debt problems bring more uncertainty.

David Mann emphasises the important trade and financial linkages between Asia and the US and suggests that the adjustment to higher US rates will come mainly through exchange rates. Phyllis Papadavid highlights how tighter Fed policy poses difficulties for financing infrastructure projects in Africa. The longer-term outlook for the continent is mixed. Mthuli Ncube points to the huge potential of digital financial services, while Danae Kyriakopoulou explains constraints from Africa’s productivity puzzle.

In the monthly Focus containing the Advisory Board’s 2017 predictions, we opine that many of the biggest shock waves will originate in the US. Tensions in global geopolitics, particularly in Asia and the Middle East, create substantial risks. A shift in the economic mix from monetary to fiscal policy threatens global bond markets and could also be suboptimal for the US economy, notes Steve Hanke.

Despite rising inflation, US-style tightening is unlikely elsewhere. As John Mourmouras argues, central banks are independent but they are also interdependent with other areas of policy and may be obliged to overreact to shocks when decisions elsewhere move in different directions.

One way to boost the effectiveness of unconventional monetary policy would be to abolish cash. Danae Kyriakopoulou reviews Kenneth Rogoff’s proposal in The Curse of Cash. We mark the passing of Hans Tietmeyer, the former Bundesbank chief, a political technocrat who negotiated and presided over the demise of the D-mark.

Other highlights of the January 2017 edition:

  • Shaokai Fan writes on the impact of the Shari'ah Standard on Gold and the precious metal's significance in Islamic finance.
  • Etsuro Honda addresses the huge overhang of government debt in Japan, and the potential solution which monetisation presents.
  • Vicky Pryce and Danae Kyriakopoulou discuss how the Greek crisis might be back on the European agenda as questions remain over debt relief.
  • Marcello Minenna and Edoardo Reviglio argue that Italy could prove resilient in 2017, though this would require flexibility in Europe's goals for the structural deficit.

The Bulletin is available to OMFIF members, and to non-members on a subscription basis. To subscribe please contact: membership@omfif.org