The Wall Street Journal reports,"new research argues emerging-market nations hit hardest in the run up to the Federal Reserve’s decision to cut back its bond buying were those whose financial houses were in the best order, relatively speaking—a finding contrary to much recent conventional wisdom".
The paper published Monday, by the National Bureau of Economic Research argues this group of relatively strong emerging-market nations took the hit because their relatively good economic and financial health was what made them attractive destinations for international capital inflows in the first place. The research was written by Joshua Aizenman of the University of Southern California, Michael Hutchinson of theUniversity of California, Santa Cruz, and Mahir Binici of the Central Bank of Turkey.
The paper considered a tumultuous period for emerging-market economies. Late last spring, Federal Reserve officials began hinting at coming cutbacks to what was then an $85 billion per month bond-buying program aimed at spurring stronger economic growth. With the U.S. recovery improving, Fed officials indicated they would soon start scaling back, or “tapering,” the bond purchases.
The NBER paper says that, "in a study of a 27 emerging-market countries, the authors said nations they considered to be the best economic and financial performers got the biggest walloping. The authors argue the hardest hit countries have been punished, in a sense, for having been such an attractive place to invest during times of ample liquidity".
The authors took stock of a wide range of Fed communications on the subject of cutting back on bond buying, and noted then-Fed Chairman Ben Bernanke was the decisive voice when it came to guidance about tapering Fed Stimulus.
Mr. Bernanke’s tapering comments “hit hardest the countries typically associated with strong international positions – countries running current account surpluses, having high reserves and low debt,” the authors wrote. “A possible interpretation is that fragile economies were less exposed to financial flows in search of higher yields during the earlier [bond buying] years; thereby they were expected to be less exposed to the immediate impact of the tapering news.”
Mr. Bernanke’s comments signaling a higher likelihood of tapering were associated with large drops in stock prices and increases in the cost of insurance on government bonds in the stronger countries, while having an “insignificant impact” on the weaker countries, the authors wrote.
“The exchange rate depreciated in both groups following tapering news from Chairman Bernanke, yet the depreciations of the stronger group were three times as large as the weaker group.”
Nations the authors grouped in the “robust” group of emerging nations included Peru, Venezuela, Israel, Korea, Malaysia and the Phillipines based on their current account balances, international reserves and external debt relative to GDP. The “fragile” group was topped by Turkey, South Africa, Argentina, Brazil and Chile.
