The emerging market (EM) crisis currently under way in Asia and Latin America may derail the incipient global economic recovery, according to QNB Group.
The financial turmoil unleashed by the Federal Reserve (Fed) announcement that it will start tapering its asset-purchasing program soon, has led to large capital flight from most EM, a large weakening of their currencies, and higher long-term interest rates globally. If the Fed starts QE tapering in its forthcoming meeting on Sept. 17-18 as announced, this is likely to unleash further EM capital flight, thus undermining their economic growth and reducing global export demand.
This will inevitably have a knock-on effect on the relatively weak growth in the US and the incipient recovery in Europe.
On June 19, Fed Chairman Ben Bernanke announced a tapering of its QE policies contingent upon continued positive US economic data.
This announcement marked an end to three waves of QE that have flooded US financial markets since 2009 with an estimated $2.9 trillion (19.3 percent of US GDP), according to the economic research of the Federal Reserve Bank of St. Louis.
The financial turmoil unleashed by the Federal Reserve (Fed) announcement that it will start tapering its asset-purchasing program soon, has led to large capital flight from most EM, a large weakening of their currencies, and higher long-term interest rates globally. If the Fed starts QE tapering in its forthcoming meeting on Sept. 17-18 as announced, this is likely to unleash further EM capital flight, thus undermining their economic growth and reducing global export demand.
This will inevitably have a knock-on effect on the relatively weak growth in the US and the incipient recovery in Europe.
On June 19, Fed Chairman Ben Bernanke announced a tapering of its QE policies contingent upon continued positive US economic data.
This announcement marked an end to three waves of QE that have flooded US financial markets since 2009 with an estimated $2.9 trillion (19.3 percent of US GDP), according to the economic research of the Federal Reserve Bank of St. Louis.
The opportunities to invest QE resources have been limited in advanced economies given the near zero interest rates in Europe,Japan and the U.S. Global financial institutions therefore used a significant portion of this liquidity to invest in EM, which offered higher returns. This led to higher EM exchange rates, lower interest rates, and to some extent higher growth momentum.
The announcement in June 19th by Chairman Bernanke that the Fed may, start tapering its bond buying,was like an alarm sign to Global financial Institutions(GFI). As has been the case in previous EM crises, it pays to be the first one out of the door, because exchange rates are still high and it is easier to liquidate large financial investments when foreign exchange liquidity is still plentiful. Accordingly, GFI have rushed to liquidate their EM investments since the Fed announcement in order to cash in their capital gains and avoid being faced with policy measures that could restrict their capital movement. The result has been a panic selling of EM exchange rates.
The Fed announcement has also lowered demand for government bonds globally, thus leading to higher long-term interest rates in EM and, to a lesser extent, in advanced economies.
Today's EM crisis has serious implications also for advanced economies. Unlike in the 1990s, advanced economies are today more than ever dependent on EM for their own growth. China, the US, Germany and Japan were the world's largest exporters in 2012 and an increasing share of their exports have flown to emerging markets in recent years. A significant decline in EM growth would inevitably have a knock-on effect on their own exports and therefore on their growth momentum. This comes at a critical time in the global recovery, where the United States is still showing relatively weak economic growth and Europe is slowly coming out of a two-year long recession. A significant slowdown in EM economic growth could therefore put in jeopardy the recovery in advanced economies as well.
Source: Arab News
