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NUSA DUA, Indonesia – A new study by the International Monetary Fund predicts emerging economies will cope with recent market turbulence without causing a major shock to their financial systems, but point to an external possibility of crisis.
Some countries, such as Argentina, are expected to experience contractions. But most will continue to grow, despite dramatic cuts in their currencies, the IMF said in its report on financial stability, released at its annual meetings in Indonesia.
In a "harshly adverse" scenario, the IMF said capital could flow out of countries at a rate never seen since the 2008 global financial crisis.
IMF Managing Director Christine Lagarde warned in a speech last week that the pressure on emerging markets "could lead to market corrections, sharp exchange rate fluctuations and further weakening of capital flows".
The stability of emerging markets came back to the fore this week when Pakistan became the last country to call for an IMF bailout, in the hope that the funds will enable it to strengthen the finances of its government.
Earlier this year, Argentina had asked for a bailout after the fall of its currency. Just months after receiving a $ 50 billion bailout, Argentina's currency has fallen further and the country has benefited from an even larger IMF bailout package.
After the financial crisis, investors sought higher returns in emerging markets at risk. Today, money is returning to the United States. What has gone wrong for countries such as Argentina and Turkey and could it get worse? Composite photo: Crystal Tai / iStock
Turkey has also faced a massive fall in its currency.
While the three countries face very different challenges, their crises share one common element: the opposite of a stronger dollar has been a weakening of their currency. Capital has flowed from their economies to the United States, partly seduced by the Federal Reserve's interest rate hike campaign.
In recent years, emerging markets have attracted significant investment flows, boosting their economies as asset prices rise and companies have more money to hire and develop.
In the severe IMF scenario, these flows could be reversed and outflows could reach 0.6% of gross domestic product. This would be "on par with the outflows seen during the global financial crisis," according to the IMF's Financial Stability Report.
"This scenario with marginal risk would likely have a significant impact on the economic performance of emerging markets, particularly for sovereigns and companies that rely on external financing," the IMF report said. "The estimated cash outflows in this scenario are much higher than, for example, in the fourth quarter of 2011, at the height of the sovereign debt crisis in Europe."
Although the scenario is not inevitable, the vulnerabilities are high. The measurement of the public debt by the IMF, which is partly a function of total borrowing, is increasing. More than 45 percent of low-income countries were highly exposed to or already struggling with debt distress, the IMF said, compared to just about 25 percent five years ago.
"This should serve as an alarm bell," Lagarde said of rising debt and the risk of capital outflows.
Write to Josh Zumbrun at [email protected]
Published in the print edition of October 10, 2018 under the title: "Emerging economies are dynamic, says IMF".
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