Emerging Markets Urged to Rebuild Fiscal Buffers and Prepare for Trillions in Climate Change Costs
Emerging markets are facing a more uncertain and volatile future, and the International Monetary Fund (IMF) is advising that they must take immediate action to rebuild their fiscal buffers and prepare for the substantial costs associated with climate change. In a speech delivered at the biennial conference of the South African Reserve Bank, Gita Gopinath, the IMF’s First Deputy Managing Director, outlined the challenges that emerging markets currently face and the steps they need to take to overcome them.
According to Gopinath, emerging markets are grappling with rising geopolitical fragmentation, difficult financial conditions, and the escalating costs of climate change. A combination of factors, such as the pandemic and Russia’s conflict in Ukraine, has raised concerns about supply chain security and national security as a whole. The increasing frequency of extreme weather events related to climate change poses the risk of significant long-term costs. These challenges are compounded by the fact that emerging markets are already experiencing a sharp rise in debt payments, with studies suggesting that annual mitigation costs could reach $2 trillion by 2030.
One country that highlights these challenges is South Africa, where the interest payments on public debt are projected to account for approximately 27 percent of revenue by fiscal year 2028/29, compared to about 19 percent in the current fiscal year.
To address these issues, the IMF recommends that emerging markets focus on rebuilding their fiscal buffers, increasing their revenues, diversifying their trade, and preparing for the financial burden of climate change. Gopinath also expressed the IMF’s expectation that global interest rates will remain high for an extended period, potentially signaling the end of the era of low interest rates. Furthermore, she highlighted the worrisome trend of trade fragmentation, which could have a negative impact on the GDP of most emerging markets, including South Africa, where losses of around 5 percent are anticipated. Some countries may even experience losses as high as 10 percent of GDP.
The fragmentation of foreign direct investment poses an additional challenge for emerging markets, as it limits their access to advanced technologies and knowledge. Gopinath emphasized that adopting large-scale industrial policies that restrict trade, mostly observed in advanced economies, has increased significantly in recent years. In 2022 alone, nearly 3,000 trade restrictions were imposed, three times the number in 2019.
In light of the risks ahead, including the structural rebalancing in China, Gopinath underscored the importance of strengthening monetary policy frameworks and incorporating climate-related financial risks to protect the financial sector. Emerging markets should also focus on increasing domestic revenues through improved tax collection rates, implementing structural reforms, and diversifying trade flows. It is crucial for these countries to develop a fiscally and socially sustainable climate strategy, which may include measures like carbon pricing.
While the challenges may seem daunting, Gopinath encouraged emerging markets to recognize the vast opportunities that lie ahead. She commended their resilience in the face of adversity and emphasized the potential for these countries to accelerate growth and enhance living standards. South Africa was specifically mentioned as a country with immense potential for a growth take-off, given its natural resources and robust institutions. The implementation of necessary reforms is essential to address the structural obstacles and unlock this potential.
As emerging markets navigate the uncertainties and complexities of the future, it is crucial for them to heed the IMF’s recommendations and take proactive steps to rebuild fiscal buffers, boost revenues, diversify trade, and prepare for the substantial costs of climate change. Only by embracing these challenges head-on can they secure a more stable and prosperous future for their economies and their people.
