Emerging Markets Weather Fallout from Financial Crisis

• Author: Mangal Goswami and Ceyla Pazarbasioglu
• Position: IMF Monetary and Capital Markets Department
• Pages: 90-91

Page 90

Despite the severe fallout from the sub-prime meltdown that is dampening world growth and depressing financial markets, emerging market countries are weathering the financial crisis relatively well, according to participants at the 10th annual Global Bond Market Forum.

"Emerging market economies so far have proven to be broadly resilient," IMF First Deputy Managing Director John Lipsky told the April 29-30 forum, jointly hosted by the Organization for Economic Cooperation and Development (OECD), the World Bank, and the IMF. It was held this year in Washington, D.C.

But Lipsky added that heightened risk aversion and liquidity retrenchment from the ongoing turbulence in global capital markets has affected financial markets in emerging economies through higher volatility, increased risk reflected in higher yields, and sharply lower bond issuance-although conditions varied widely across countries.

"These developments clearly demonstrate the interdependence of both risks and their transmission in an increasingly integrated global financial market," Lipsky said.

Jaime Caruana, Director of the IMF's Monetary and Capital Markets Department, said emerging markets had done well despite the dislocation in credit and funding markets, particularly in the United States, because of their improved economic and fiscal policies, high external liquidity positions, robust current account surpluses, and strong growth.

Emerging market governments and many companies have used the favorable market and external conditions of the past five years to improve their capacity to weather a drought of external capital. Central bank reserves have grown and corporate cash levels remain high.

But Caruana told the conference that emerging market countries are vulnerable to the market turmoil through three main financial channels:

* The general repricing of credit risks has increased the cost of external financing and reduced the availability of funding.

* Because of pressure on parent banks in mature markets, funding of subsidiaries in emerging markets could recede, although this so far has not been the case.

* If growth slows in emerging markets, investment flows could retrench, prompting a sharp correction in equity valuations and increased potential for currency volatility.

The importance of a more complex distribution of liquidity across the financial landscape was underscored by Hans...