IMF: Emerging markets still losing steam

Growth in emerging markets will slow for a fifth consecutive year, the IMF said Tuesday, as exchange rate swings and oil prices plunge, and China's economic growth slows.

The International Monetary Fund said Tuesday it expected the emerging markets to post growth of 4.3 percent in 2015, down from 4.6 percent in 2014 and 5.0 percent in 2013.

"In emerging markets, negative growth surprises for the past four years have led to diminished expectations regarding medium-term growth prospects," the IMF said.

The slowdown, if not outright contractions, is evident in most of the major emerging markets, known as the BRICS.

Only India and South Africa are expected to see growth increase this year. Brazil and Russia are to contract.

Meanwhile growth is to slow in China, which has been the driver of global growth in recent years.

The IMF expects the expansion of the Chinese economy to slow from 7.4 percent last year to 6.8 percent this year and 6.3 percent next year.

"The gradual slowdown in China and the partly related decline in commodity prices (which also reflected a sizable supply response) weakened the growth momentum to some extent in commodity-exporting countries and others with close trade links to China," the Fund said.

- Oil, greenback big risks -

Although the IMF, which is holding its twice-annual meeting this week in Washington, expects emerging market growth to rebound to 4.7 percent next year, it remains concerned about the risks that sharp changes in currency exchange rates and oil prices could act as a drag.

While oil prices have fallen by around half since hitting a peak last June, that is not universally good news for emerging countries, particularly oil exporters facing other economic difficulties like Russia and Venezuela.

The drop in other commodity prices will hurt in particular Latin America and the Caribbean region, which is heavily dependent on exports of raw materials. The IMF now expects the region will muster only 0.9 percent growth this year, down from the 1.2 percent growth it had forecasted in January.

The rise of the dollar against emerging market currencies complicates the situation as many have debts denominated in dollars.

"There are balance sheet and funding risks, especially in emerging market economies, if dollar appreciation continues," the IMF report said.

Another worry is US monetary policy. The US Federal Reserve is nearing a first hike in policy interest rates from the near zero levels they have been stuck at for years. Market interest rates have been increasing in expectation, which could provoke a shift of investment funds.

"Emerging market economies are particularly exposed: they could face a reversal in capital flows, particularly if US long-term interest rates increase rapidly, as they did during May-August 2013" when several countries faced difficulties, the Fund said.

This time around, with the sharp fall in oil prices, oil exporters are more vulnerable while importers have better buffers.

- IMF wants reforms -

"Several years of downgraded medium-term growth prospects suggest that it is also time for major emerging market economies to turn to important structural reforms to raise productivity and growth in a lasting way," said the Fund, which has regularly called on countries to take steps to improve performance.

The IMF identified three priority areas: improving infrastructure, notably to remove bottlenecks in the power sector; easing limits on trade and investment and improving business conditions; and raising competitiveness and productivity through reforms to education, labour and product markets.

"In India, the post-election recovery of confidence and lower oil prices offer an opportunity to pursue such structural reforms," the IMF said.

It upgraded its forecasts for India, which it now sees expanding by 7.5 percent this year and next, after having grown by 7.2 percent last year.

South Africa's growth is expected to pick up from 1.5 percent last year to 2.0 percent, but that forecast has been trimmed by 0.1 percentage points from the last forecasts in January.

The IMF said it sees Russia's economy, hit hard by the fall in oil prices and Western sanctions over the Ukraine crisis, contracting by 3.8 percent this year, worse than the 3.0 percent it forecast in January.

The Fund also switched its forecast for commodity exporter Brazil from growth to a contraction of 1.0 percent this year.