World Economy

EMs Can Weather Fed Tightening

EMs Can Weather Fed TighteningEMs Can Weather Fed Tightening

Emerging markets should be able to weather the storm of Federal Reserve tightening because they’ve started drawing in capital again and their economies are improving, a leading Federal Reserve official said Thursday.

Speaking to the annual meeting of the Institute of International Finance, Fed Gov. Jerome Powell said he expects the challenges posed to emerging economies from the normalization of global financial conditions will be “manageable”, MarketWatch reported.

Powell acknowledges that, in the past, capital flows to emerging economies could be at risk when the US and other industrialized nations tighten monetary policy, by encouraging capital to return to advanced economies, putting downward pressure on emerging market currencies and enlarging emerging economy debt burdens.

As emerging economies have improved—the downward trend in China has flattened, Brazil has moved into recovery and other countries have picked up—capital flows to emerging economies have rebounded.

Powell says what’s important is the state of economic fundamentals in the emerging economies themselves. One index that measures emerging market vulnerabilities finds them lower now than in the 1990s, though trending up since 2008.

While risky emerging economy corporate debt has almost tripled since 2011, it’s still much lower than just before the Asian crisis, at 30% of GDP now compared with around 46% then. “The situation is not alarming, but risks are significant and bear close watching, especially in China,” he said.

Meanwhile, emerging market stocks sailed to fresh six-year highs, buoyed by optimism over global growth and company earnings, Reuters reported.

Currencies from emerging economies benefited from the dollar stalling on concerns over US President Donald Trump’s tax plan.

MSCI’s emerging market index added 0.4% in its second straight day of gains, trading at its highest level since August 2011 as Asian heavyweights tracked the global rally that saw Wall Street scaling all-time highs on Tuesday.

South Korea’s KOSPI index added 1% to close at record highs as expectations for robust third-quarter earnings from corporates such as Samsung Electronics boosted market sentiment. Taiwan stocks matched those gains.

Investors risk appetite was whetted after the International Monetary Fund raised its outlook for the global economy, indicating the current broad-based global economic upswing will likely be sustained this year and next.

The IMF upgraded its global growth forecast for 2017 by 0.1 percentage points to 3.6% and to 3.7% for 2018, driven by a pickup in trade, investment and consumer confidence.



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