Emerging market currencies have tumbled, equities have fallen and bond yields have risen steadily since the middle of the year, when Fed officials flagged the possibility that they could lift their near-zero rates in the second half for the first time in nine years.
Advertisement
That is despite warnings from the likes of broker Citi that a global growth recession centered on emerging markets and China is likely over the next two years.
“Emerging and frontier market economies may hope for the best during the upcoming tightening cycle, but given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy”, said Carlos Arteta, one of the paper’s authors. According to the Economist, the fluctuation in the “emerging-market currencies that have occurred so far may be a sign of more trouble to come”.
Investors in emerging markets are paying particularly close attention to the Fed.
“An abrupt change in risk appetite for emerging market assets could become contagious and affect capital flows to many countries”, Kose said.
The bank urged developing countries to “strengthen the resilience of their economies and take steps to speed growth”, including “credible monetary policies” to contain inflationary risks and the use of fiscal policies “if budgets permit”. Structural reforms can be slow to show benefits, but decisive reform agendas can signal to investors that growth prospects are improving. When interest rates rise, many of those debts could become unsustainable.
“So it’s a difficult situation in a world where we do not have a synchronized global recovery, where arguably the world’s most important liquidity provider is tightening policy, and that will continue to hit commodity prices“.
However, the outlook remains more promising for India, which is expected to post GDP growth of 7.2 percent this year and 7.3 percent in 2016, both only 0.1 percentage point lower than the OECD’s June estimates.
Designed to prevent ruling parties abusing monetary policy to help win elections, some critics reckon central bank independence itself is the historical experiment and stress that it has not prevented booms and busts or market crises nor has it been unambiguously positive for everyone.
Only seven of 17 respondents polled by Reuters expect a Fed rate rise this week.
Advertisement
It may also remove an uncertainty dogging their markets.
