Anxiety Over Protectionism Casts a Pall Over IMF Meetings

Fear reigned supreme at the annual gathering of finance ministers and global bankers last week, as policymakers grappled with growing populism around the globe.


Andrew Harrer

In its latest World Economic Outlook, published twice a year, the International Monetary Fund reiterated its earlier forecast for 3.1 percent GDP growth this year, following a downgrade in July.

That seems to be what passes for optimism at the IMF these days. Indeed, the anxiety permeating the IMF/World Bank annual meetings in Washington, D.C., last week was almost palpable. What’s driving the persistent feeling of gloom: a global populist backlash that has stoked resentment against Wall Street and the big banks since the global financial crisis, propelling fringe candidates to the front of the world political stage and ultimately breaking apart the European Union, according to numerous global financial leaders who attended the summit.

The meetings — the first since the Brexit referendum, when the U.K. voted to leave the European Union — came at a time of heightened political risk and uncertainty in nearly every region of the world. Persistently low and even negative interest rates around the world, combined with sluggish and uneven GDP growth and rising income inequality, have created a simmering resentment among workers who feel they have been left behind by globalization.

Now that resentment appears to be boiling over. In a series of speeches and comments to the press during the meetings, IMF managing director Christine Lagarde warned that the resulting protectionist rhetoric creeping across the developed world, most famously espoused by U.S. presidential candidate Donald Trump, presents a real threat to trade and economic growth.

Others echoed her concern. “More and more, people don’t trust their elites,” Germany’s Finance minister Wolfgang Schäuble said during a panel discussion. “They don’t trust their economic leaders, and they don’t trust their political leaders.”

This is especially true of the world’s investment bankers. Perhaps the only thing unifying the two major political parties in the U.S. is an abiding suspicion of Wall Street, which reached a fever pitch after the global financial meltdown of 2008. The most recent scandal — in which Wells Fargo was ordered to pay $185 million in fines after news broke that employees had been collecting fees on accounts opened without customers’ knowledge or consent — only fueled the fire.

While the Brexit vote and Trump’s rise are the starkest manifestations of the populist groundswell, political risk isn’t constrained to the U.K. and the U.S., as the rise of Marine Le Pen in France and the anti-capitalist rhetoric of the Five Star party in Italy show.

On Saturday the IMF steering committee called on policymakers of member countries to use all tools at their disposal — low interest rates, structural reforms and fiscal stimulus wherever possible — to promote growth, with an eye to reaching the world’s poorest. The global bankers attending the gathering endorsed this approach.

Few know the problem as well as the government-owned State Bank of India, which has been drafted by Prime Minister Narendra Modi for a critical role in his financial inclusion agenda. The country’s largest lender created a mobile banking platform geared toward the country’s poorest citizens that has already opened over 5 million accounts, according to Sujit Kumar Varma, SBI’s chief general manager for the international banking group.

In June the government gave SBI the greenlight to merge with five associate banks, bringing its market share in India to about 25 percent, up from 17 to 18 percent. Yet Varma says that, like other leaders in attendance, he is also wary of how political uncertainty and protectionist policies in the Western world could affect India and global growth prospects.

“We cannot continue in this environment of uncertainty,” Varma tells Institutional Investor. “It’s not good for anyone.”

To that end, he says, the bank will not be aggressive in expanding its international loan book (and it also has to resolve gross non-performing assets of about 5 percent of total loans). “We’ll grow very cautiously,” he says, adding that SBI is waiting to see how Brexit unfolds.

Meanwhile, in the Middle East, wars in Yemen, Syria and Iraq are sapping resources, while Gulf countries are scrambling to diversify their economies after the price of crude oil nosedived by more than half since its peak in the summer of 2014.

Riad Salameh, governor of Lebanon’s central bank, Banque du Liban, insists Lebanon’s economy remains resilient, with growth between 1.5 and 2 percent this year despite political turmoil that’s left the country without a head of state since 2014. Still, that’s far below the 8 to 9 percent annual growth rate the country enjoyed before 2011. And Lebanon now has to contend with growing pains from absorbing over a million refugees from its war-torn neighbor Syria.

“What Lebanon needs is political stability,” Salameh tells Institutional Investor, arguing that any good news or clarity from the political sphere would bolster confidence from investors. “Until then the central bank is filling the gap.”

Indonesia offers a glimmer of hope. The island nation, which will be hosting the 2018 annual meetings in Bali, had its name plastered on booths all over the IMF headquarters and brought an Indonesian dance troupe to perform on Saturday.

In late September, Bank Indonesia, the country’s central bank, cut its benchmark rate by 25 basis points to 5 percent in a bid to prop up domestic demand.

“We see there is still room for accommodation in central bank policy,” Perry Warjiyo, deputy governor of Bank Indonesia, tells Institutional Investor. Nevertheless, there’s a long road ahead. A strong dollar, matched with China devaluing the yuan, has put pressure on emerging-markets economies that rely on cheap exports and high commodity prices.

But it’s not keeping Warjiyo up at night. “We’ve been building layers of cushion against external shocks,” he says, sounding a rare note of calm at the summit.