Cementing the gains from financial globalization
| Author | David Hauner/Manmohan S. Kumar |
| Position | IMF Fiscal Affairs Department |
| Pages | 33-43 |
Page 33
Financial integration and the prevailing benign global financial market environment have made it possible for emerging market economies to improve their external financing and budgetary positions and to borrow more externally. However, an IMF Working Paper finds that, while an improvement in fundamentals has played an important role in some of the countries, the recent decline in the fiscal deficits of some others reflects the benign environment.
For those, a deterioration in the environment could reverse the gains. They should therefore strengthen their polices, including by pursuing additional structural reforms.
Page 42
Over the past decade, emerging market economies have become increasingly integrated with the global financial marketplace. Improved market access stemming from financial globalization has important positive implications for a country's capital account and economic growth.
Are there fiscal payoffs as well? A new IMF Working Paper finds that, indeed, financial integration and a benign global financial market environment in recent years have resulted in improved external financing and budgetary positions. The potential for a reversal of favorable external conditions, however, underlines the need for further fiscal reforms.
Financial integration has permitted emerging market economies as a group to borrow externally more than ever before. In nominal U.S. dollar terms, emerging market public external debt grew markedly over the 1990s and has grown even faster since 2000. It is the composition of external debt, however, that shows best how much market access has improved: while external debt to official creditors and banks has been declining, market-placed bond debt, which hinges much more on investor confidence than do bank loans, has grown rapidly and now makes up a larger share of these countries' external debt than at any point in the past three decades.
Three sets of mutually reinforcing factors underlie the recent improvement in market access:
Improved fundamentals. Many emerging markets have improved their fundamentals by pursuing sound macroeconomic policies, implementing structural reforms to improve incentives for savings and investment, and...
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