Managing Director IMF Christine Lagarde - Photo by IMF

JAKARTA (TheInsiderStories) – Christine Lagarde, the managing director of the International Monetary Fund, sent a warning that the tightening global financial market may lead to an outflow of US$100 billion from emerging market debts excluding China.

She called for emerging market for cautions on private borrowing and more sustainable debts.

“As the global economic weather is beginning to change, countries need to manage the risks, step up reforms, and modernize the multilateral system to achieve durable more widely shared growth,” said Lagarde in a speech in Washington, D.C. ahead of the IMF-World Bank Annual Meetings in Bali on Oct. 8-14.

in her speech, Lagarde said, all countries can learn from Indonesia and its ASEAN partners—especially when it comes to building resilience, embracing openness, and reaching out across borders.

She added, “We saw this clearly during the global financial crisis. This multilateral spirit is captured well by a beautiful Indonesian phrase—gotong royong, “working together to achieve a common goal.” This spirit is needed more than ever to meet the challenges ahead.”

According to her, Global growth is still at its highest level since 2011 when economies were rebounding post-crisis. Unemployment is still falling in most countries. And the proportion of the global population living in extreme poverty has dropped to a new record low of less than 10 percent.

New World Bank analysis shows that extreme poverty dropped to 10 percent in 2015, the latest year for comprehensive data, and the Bank estimates that the decline has continued over the past three years.

In other words, the world continues to experience an expansion that holds the promise of higher incomes and living standards. For most countries, it has become more difficult to deliver on the promise of greater prosperity, because the global economic weather is beginning to change.

Today, she explained, some of those risks have begun to materialize. There are signs that global growth has plateaued. It is becoming less synchronized, with fewer countries participating in the expansion.

“In July, we projected 3.9 percent global growth for 2018 and 2019. The outlook has since become less bright, as you will see from our updated forecast next week,” said Lagarde.

A key issue is that rhetoric is morphing into a new reality of actual trade barriers. This is hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise.

For now, she stated, the United States is growing strongly, supported by a pro-cyclical fiscal expansion and still easy financial conditions—which can become a risk in a maturing business cycle. In other advanced economies, however, there are signs of slowing, especially in the euro area and, to some extent, in Japan.

Emerging Asia continues to grow at higher rates than other regions, but in her eyes indicators of moderation in China, which will be exacerbated by the trade disputes. Meanwhile, challenges have been mounting in a number of other emerging market and low income countries—including in Latin America, the Middle East, and Sub-Saharan Africa.

Many of these economies are facing pressures from a stronger US dollar and a tightening of financial market conditions. Some of them are now facing capital outflows.

“To be clear, we are not seeing broader financial contagion—so far—but we also know that conditions can change rapidly. If the current trade disputes were to escalate further, they could deliver a shock to a broader range of emerging and developing economies,” she said.

Furthermore, Lagarde stressed it, at times like these, policymakers need to manage the risks, step up reforms, and modernize the multilateral system. “Or, to put it in shipping terms, we need to steer the boat, not drift!, ” adds by the managing director.

In her view, the immediate challenge is to strengthen the rules. This includes looking at the distortionary effects of state subsidies, preventing abuses of dominant positions, and improving the enforcement of intellectual property rights.

“On these issues, we can be encouraged by the growing number of discussions and proposals, most recently from Canada and the European Union. These are positive steps, and there is further work to be done,” she said.

IMF’s latest analysis shows that by reducing trading costs for services by 15 percent, could boost total GDP of G20 countries by more than US$350 billion this year. That would be the equivalent of adding another South Africa to the G20.

In fact, global debt—both public and private—has reached an all-time high of $182 trillion—almost 60 percent higher than in 2007. This buildup has left governments and companies more vulnerable to a tightening of financial conditions.

Emerging and developing economies are already feeling the pinch as they adjust to monetary normalization in the advanced world. That process could become even more challenging if they are not to accelerate suddenly.

“It could lead to market corrections, sharp exchange rate movements, and further weakening of capital flows,” warned by her.

She estimate that emerging economies—excluding China—could potentially face debt portfolio outflows of up to $100 billion—which would broadly match outflows during the global financial crisis. She said, “This should serve as a wake-up call. We are not there yet, by any means. But some countries are already facing rough waters.”

She said, emerging economies can create this room by reducing risks from high corporate debt, while greater efforts are needed to make government borrowing more sustainable in low-income countries. In many cases, creating more room means allowing flexible exchange rates to absorb some of the pressures from capital flow reversals.

On that point, IMF analysis shows that countries with greater exchange rate flexibility experienced smaller output losses after the global financial crisis.

“We also found that economies are more resilient when their monetary policy is more trusted and when their independent central banks communicate clearly,” said Lagarde.

All countries can create the room they need by reducing government deficits and placing public debt on a gradual downward path. This should be done in a fair and growth-friendly way—through more efficient spending and by ensuring that the burden of adjustment is shared by all.

At the same time, countries should not overlook another aspect of their balance sheets—the public wealth that is tied up in government financial assets, public companies, and natural resources.

IMF estimate: the median public debt level among low-income countries increased from 33 percent of GDP in 2013 to 47 percent. 7 of 31 countries showing total public assets of more than $100 trillion, well over twice their GDP.

Improving the management of these public assets could deliver additional revenues of about 3 percent of GDP per year—which is significant. In fact, that is equal to what advanced economies collect in corporate tax in a year.

“Guarding against potential turbulence will require countries working together in a cohesive and collaborative manner. As an example of this, we know that governments can make their economies less vulnerable to disruptive capital flows by reducing current account imbalances,” Lagarde ended her speech.