Emerging Market Crisis

11 Key excerpts on "Emerging Market Crisis"

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  The Global Crash

  Towards a New Global Financial Regime?

  • L. Talani(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Crisis solutions that do not address the causes of the fundamental imbalance between developed and develop- ing countries’ external positions may be destined to produce effects only in the short term. Yet, the crisis represents a unique opportunity to build a more balanced and, hence, more stable world economy. The rest of the chapter is organized as follows. The next section describes the international macroeconomic situation in the world econ- omy, at the time of writing. The third section presents the debate on global imbalances and the role of emerging markets in the crisis. The fourth section reviews the policy debate, followed by ‘Conclusions’. The impact of the crisis on emerging markets Emerging markets displayed a remarkable resilience in the wake of the crisis and, at least in the beginning, there was a widespread opinion that emerging markets had ‘decoupled’. The greater resilience of emerging markets was considered a consequence of the better policies imple- mented after the emerging market crises of the second part of the 1990s. On most accounts, emerging markets, especially Asia, displayed macro- fundamentals in good shape 3 and better institutions. These, eventually, were not sufficient to keep emerging markets out of trouble. 4 Initially, however, commentators concentrated on the short-term implications for emerging markets. Goswami and Pazarbasioglu (2008) present the general view of commentators at the 10th Global Bond Market Forum. In spite of the better policy underpinning in an increas- ingly integrated world, emerging markets were going to be affected by increased volatility and perceived risk, and consequently higher spreads and a reduction in the availability of external funds. 5 Impact on growth The depth and the width of the impact of the crisis on advanced and emerging economies can be gauged from Figure 5.1.

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  Emerging Markets Megatrends

  • Rajiv Biswas(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  © The Author(s) 2018 Rajiv Biswas Emerging Markets Megatrends https://doi.org/10.1007/978-3-319-78123-5_11

  Begin Abstract

  11. Crisis Prevention and Resolution in Emerging Markets

  Rajiv Biswas

  1  

  (1) London, UK

   

  End Abstract

  Over the past 50 years, many developing countries have displayed a high degree of vulnerability to economic crises for a number of reasons, including poor macroeconomic management, high and unsustainable levels of external debt, political instability, excessive reliance on commodity exports and lack of fiscal resources to manage economic fluctuations. These vulnerabilities often magnify the transmission effects on the domestic economy and banking sector from external shocks. The consequences have often been severe, and have frequently resulted in protracted recessions with harsh negative economic and social impact effects, including declining living standards that push an increasing share of the population into poverty.

  Since 1975, there have been an estimated 200 economic crises in developing countries attributable to either a banking crisis or a sovereign debt crisis or a combination of both (Balteanu and Erce 2014). The frequency with which such crises have occurred highlights the vulnerability of developing countries and the need for economic and financial sector reforms to mitigate such risks.

  One of the most significant emerging markets crises that occurred during the 1980s was related to the surge in oil prices during the two major oil price shocks of the 1970s. This resulted in a large accumulation of petrodollar surpluses of Middle East oil exporting nations in the international banking system. As petrodollar deposits accumulated in the international banks, it triggered rapid growth in lending by international banks to emerging markets, in order to recycle the large growth in bank deposits to generate revenue, with international bankers incentivized by commission structures to boost loans. Latin America

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  An Assessment of the Global Impact of the Financial Crisis

  • P. Arestis, R. Sobreira, José Luis Oreiro, P. Arestis, R. Sobreira, José Luis Oreiro(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  108 6 The Impact of the Current Crisis on Emerging Market and Developing Countries Jesus Ferreiro and Felipe Serrano 1 Introduction When analysing the relations between developed economies and emerging market and developing economies, it is easy to see how the latter have been traditionally dependent and influenced by the cyclical behaviour of the former and by the turmoils generated in them. Expansions in advanced economies implied a positive development framework for developing countries, which benefited from higher export flows and from a suitable financial environment in the shape of higher capital inflows. By contrast, recessions in developed economies dragged devel- oping economies with them due to the negative impact generated on exports and net capital inflows. Even more, the economic deterioration in developing economies was aggravated by episodes of currency and banking crisis and by the inability of these countries the application of anti-cyclical policies. In fact, the need to restore some sound macro- economic foundations, mainly to reduce fiscal unbalances and ensure capital inflows, forced to apply restrictive demand-side policies, which, in turn, damaged the economic situation. The final result was a strong con- vergence and synchrony of the economic cycle of developed and developing economies, but where the cycle volatility was bigger for the latter. Taking this traditional pattern as a basis, we would expect that the present economic crisis, generated in advanced countries, would have affected emerging market and developing economies with higher inten- sity, and that the economic deterioration of these economies, given its magnitude, would have been the most serious since the Great Depression, especially if we consider that the record figures of foreign trade and capi- tal flows of these economies, in principle, imply an increased relevance of the traditional transmission channels of economic activity of advanced

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  Macroeconomics in Emerging Markets

  • Peter J. Montiel(Author)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  18, pp. 619–635. Sachs, Jeffrey, Aaron Tornell, and Andres Velasco (1996), “Financial Crises in Emerging Markets: The Lessons from 1995,” unpublished manuscript. Steiner, Roberto (1995), “The Mexican Crisis: Why Did It Happen and What Can We Learn?” unpublished manuscript, World Bank. Tanboon, Surach (1998), “An Analysis of the Thai Currency in Retrospect,” unpublished manuscript, Williams College. Warner, Andrew M. (1997), “Mexico’s 1994 Exchange Rate Crisis Interpreted in Light of the Nontraded Model,” working paper 6165, National Bureau of Economic Research. Werner, Alejandro M. (1995), “The Currency Risk Premia in Mexico: A Closer Look at Interest Rate Differentials,” unpublished manuscript, International Monetary Fund. 28 Lessons from the Emerging-Market Crises of the 1990s and 2000s In the preceding chapter, we examined the 1994 Mexican and 1997 Thai financial crises in some detail because these were two of the most important crises among emerging economies that entered the decade of the 1990s with a policy commitment to reform domestic financial systems and integrate themselves more fully with international financial markets. But the decade of the 1990s was characterized by a spate of financial crises, afflicting many other emerging economies as well. Partly, this may have reflected contagion (spillover effects) from the crises we have studied, for example, those of Argentina in 1995 or of several East and Southeast Asian economies in 1997. But partly, these emerging-economy crises have also been homegrown, for example, the Brazilian crisis of 1999 and the Argentine crisis of 2001–2002. Moreover, the incidence of financial crises has not been restricted to emerging economies. Crises have also occurred among industrial countries (e.g., the Nordic banking crisis that we reviewed in Chapter 26 and the European Exchange Rate Mechanism (ERM) crisis of 1992) as well as transition economies (the Russian crisis of 1998).

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  Financial Crises, Liquidity, and the International Monetary System

  • Jean Tirole(Author)
  • 2002(Publication Date)
  • Princeton University Press

    (Publisher)

  1

  Emerging Markets Crises and Policy Responses

  Many excellent books and articles have documented the new breed of “twenty-first century” financial crises.1 I will therefore content myself with a short overview of the main developments. This chapter can be skipped by readers who are familiar with Emerging Markets (EM) crises.

  The pre-crisis period

  No two crises are identical. At best we can identify a set of features common to most if not all episodes. Let us begin with a list of frequent sources of vulnerability in recent capital-account crises.

  Size and nature of capital inflows. The new breed of crises was preceded by financial liberalization and very large capital inflows. In particular the removal of controls on capital outflows (the predominant form of capital control) has led to massive and rapid inflows of capital. Instead of inducing onshore capital to flow offshore to earn higher returns, these removals have enhanced the appeal of borrowing countries to foreign investors by signaling the governments’ willingness to keep the doors unlocked.2

  At the aggregate level, the net capital flows to developing countries exceeded $240 bn in 1996 ($265 bn if South Korea is included), six times the number at the beginning of the decade, and four times the peak reached during the 1978–82 commercial lending boom.3 Capital inflows represented a substantial fraction of gross domestic product (GDP) in a number of countries: 9.4 percent for Brazil (1992–5), 25.8 percent for Chile (1989–95), 9.3 percent in Korea (1991–5), 45.8 percent in Malaysia (1989–95), 27.1 percent in Mexico (1989–94) and 51.5 percent in Thailand (1988–95).4

  This growth in foreign investment has been accompanied by a shift in its nature, a shift in lender composition, and a shift in recipients. Before the 1980s, medium-term loans issued by syndicates of commercial banks to sovereign states and public sector entities accounted for a large share of private capital flows to developing countries, and official flows to these countries were commensurate with private flows.

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  Bailouts or Bail-Ins?

  Responding to Financial Crises in Emerging Economies

  • Nouriel Roubini, Brad Setser(Authors)
  • 2004(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  25 2 New Nature of Emerging-Market Crises Back in 1997, then US Treasury Deputy Secretary Lawrence Summers liked to compare modern finance to a jet plane. The technology of mod-ern finance, like a jet plane, lets you get to your destination faster than older transportation technology. But the rare crashes that occur along the way are also more spectacular. To Summers, the occasional crash was not sufficient cause to abandon the technology of modern finance. This analogy now seems to suffer from one problem. Emerging-market economies crash more frequently than 747s. The jet planes flown by major airlines are a mature technology, safer than the piston-powered planes they replaced. After “financial” crises in Mexico, Thailand, Korea, In-donesia, Malaysia, Russia, Brazil, Turkey, and Argentina—as well as crises in smaller economies like Ecuador, Ukraine, Uruguay, and the Do-minican Republic—it seems clear that emerging economies are still at the early stages of understanding how they can best benefit from global fi-nancial markets. 1 The collapse of an exchange rate peg, whether a soft peg or a currency board, has marked almost all recent crises. 2 A currency crisis, though, is 1. See the recent IMF study by Rogoff et al. (2003) for an examination of whether or not cap-ital account liberalization has brought benefits to emerging-market economies. The debate on capital account liberalization is highly contested: Stiglitz (2002) and Rodrik and Kaplan (2001) offer a skeptical perspective of the benefits of capital account liberalization. 2. Mexico, Thailand, Korea, Indonesia, Malaysia, Russia, Brazil, and Uruguay all had had soft pegs or pegged but adjustable exchange rates before the crisis. Turkey had a regime with a programmed rate of depreciation well below the current inflation rate (formally a forward-looking crawling peg) reinforced by a “quasi currency board.” Argentina had a currency board.

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  Preventing Currency Crises in Emerging Markets

  • Sebastian Edwards, Jeffrey A. Frankel, Sebastian Edwards, Jeffrey A. Frankel(Authors)
  • 2009(Publication Date)
  • University of Chicago Press

    (Publisher)

  It is also important to recognize that a banking system’s situation can change dramatically in a very short time. This easily happens when a con-centration of liabilities (say, real estate loans) becomes bad, or a spell of high interest rates causes a general deterioration of a loan portfolio that had been only slightly above marginal. If the banking system’s funding is short-term, the makings of a crisis emerge very quickly. The Turkish crisis of December 2000 is a great example. In a situation of a large number of bad banks (not the major part of the banking system though), a withdrawal of credit lines triggered a banking crisis; the central bank financed the run on the banks by pumping in credit only to repurchase the liquidity in selling foreign exchange. Reserve depletion within days threatened the maintenance of an IMF-supported, exchange rate–based stabilization program. A Primer on Emerging-Market Crises 747 The corporate sector, like the banking system, has balance sheets that are vulnerable to mismatch issues of maturity and denomination. The larger the corporate sector’s short-term debt in the national balance sheet, the more vulnerable the country is to a funding crisis, which can then become a currency crisis. Once again, when credit to a particular sector is withdrawn, in emerging markets that means a capital outflow and not a substitution into other assets. For that reason, balance sheet problems become currency crisis issues. Indonesia and Korea are examples of countries where formidably bad balance sheets—huge debt-equity ratios and large foreign exchange expo-sure—were a major part of the crisis situation. Typically, it takes weeks to determine just how large the external exposure is. Creditors will be reluctant to take haircuts, and debtors are under no pressure to yield. The protracted debt problem overshadows postcrisis credit normalization. Whenever capital flight emerges, the question of the exchange rate regime is immediate.

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  Issues in Emerging Market Economies

  • Alper Sönmez, Dilek Çetin, Alper Sönmez, Dilek Çetin(Authors)
  • 2018(Publication Date)
  • Peter Lang Group

    (Publisher)

  (2005). Stabilization and Reform in Latin America: A Macroeconomic Perspective on the Experience since the Early 1990s.” IMF Occasional Paper, (238), 136 pages, Occasional Paper No. 238. Washington DC. Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European economic review, 44(7), 1389–1408. Temple, J. (2002). Openness, inflation, and the Phillips curve: a puzzle. Journal of Money, Credit, and Banking, 34(2), 450–468. Zhang, C. (2015). The Effect of Globalization on Inflation in New Emerging Markets. Emerging Markets Finance and Trade, 51(5), 1021–1033. Zhang, C., Song, K., & Wang, F. (2015). Economic Globalization and Inflation in China: A Multivariate Approach. China & World Economy, 23(3), 79–96. Fatih Şahan 10 Global Financial Crisis and Unemployment in EMEs Abstract: The world economy experienced a serious slowdown with the 2008 global economic crisis. Many countries recorded negative income growths and unemployment rates rose after the crisis. There is a widely discussed issue that advanced economies felt the negative outcomes of the crisis more deeply than the emerging ones on their econo- mies in terms of macroeconomic indicators. One of the major areas where the harmful effects of the crisis were seen is on labor markets and unemployment. Within this scope, this chapter aims to scrutinize the impacts of the financial turmoil of 2008 on the labor markets of emerging market economies (EMEs). Using IMF classification, 23 EMEs were analyzed by adopting important labor market indicators for the period 2000–2014. The study was conducted by analyzing first, unemployment rates, and secondly by analyzing, labor market indicators such as employment, labor force participation rates, labor pro- ductivity, wages and prices. The conclusion of this study is that EMEs had modest negative impacts on their labor markets following the crisis.

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  World Economic Outlook, October 1998 : Financial Turbulence in the World Economy

  • International Monetary Fund(Author)
  • 1998(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  World Economic Outlook , historical experience suggests that the duration and speed of recovery from financial crises vary considerably from case to case, often depending on how effectively financial sector problems and corporate sector difficulties—which are often an integral part of the financial sector weaknesses contributing to crises—are dealt with. In the current crisis, too, how deftly the financial and corporate sector problems are managed will be important—not only for the strength of the initial pickup in activity, but also or the prospects for sustained recovery. To a large extent this will determine whether the east Asian countries are in store for a protracted period of slow growth, as in Japan since the early 1990s, a U-shaped recovery, as in the case of Chile in the early 1980s, or a sharp rebound, as in Mexico in the mid- 1990s.

  In addition to the domestic conditions for recovery discussed above, economic prospects for the crisis countries are interdependent, given the importance of intraregional economic relations: on this account, recoveries will tend to be mutually reinforcing for the same reasons that the downturns have been mutually damaging. Economic prospects for the crisis countries will also depend critically on the external environment. Particularly important, in this regard, are the health of the Japanese economy, exchange rate developments among the major currencies and within the region, success in resolving the financial sector problems that afflict much of the region, and conditions in international capital markets, as discussed in Chapter I .

  How Have Other Emerging Market Economies in Asia Been Affected?

  Among the countries in Asia that have felt the crosscurrents from the crisis, growth projections have been revised the most for Hong Kong SAR

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  Latin America and the Caribbean in the World Economy 2009 - 2010

  A Crisis Generated in the Centre and a Recovery Driven by the Emerging Economies

  • (Author)
  • 2011(Publication Date)
  • United Nations Publications

    (Publisher)

  29 Latin America and the Caribbean in the World Economy • 2009-2010 Chapter I A crisis created in the centre and a recovery driven by the emerging economies A. Introduction As of mid-2010, the global economic and trade recovery is proving more robust than expected, but more uneven than could be desired. This faster rebound is due in part to the expanding Asian and emerging economies and in part to the forceful countercyclical response in the form of fiscal, monetary and financial policies adopted by most of the industrialized and developing countries. Markedly dissimilar rates of growth —high in the emerging economies and low in the industrialized ones— are working against a more sustainable recovery. Progress towards such a recovery requires international coordination in managing strategies for exiting the crisis. Financial reforms and a rebalancing of the world economy are needed, too, with the economies with the largest current-account surplus stepping up domestic spending. Some emerging economies have begun to phase out their stimulus packages and raise interest rates. This increases the interest rate differential with the industrialized economies and could send destabilizing capital flows towards the emerging economies, setting them up for eventual overheating and speculative bubbles. Currencies tend to appreciate as speculative bubbles form, making imports cheaper and hampering the diversification of exports. The bubbles can burst if the rise in spending is not managed well, with grave fiscal, financial and balance of payments repercussions. Countercyclical policies helped cushion the impact of falling private spending and stem the loss of confidence in the financial markets. The recovery began in China and Economic Commission for Latin America and the Caribbean (ECLAC) 30 continued in India, spreading to the rest of the Asia-Pacific region and from there to the other emerging economies.

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  In Good Times Prepare for Crisis

  From the Great Depression to the Great Recession: Sovereign Debt Crises and Their Resolution

  • Ira Lieberman(Author)
  • 2018(Publication Date)
  • Brookings Institution Press

    (Publisher)

  Both the government and the private sector became deeply indebted in dollar terms. Government debt grew increasingly short-term, a sign in other crises of trouble to come. The economy was largely dollarized. The East Asian crisis (1997–99) and the Russian crisis (1998) led to global conta-gion and a “flight to quality” among emerging of market investors. The 1999 mas-sive devaluation of the real by Brazil was perhaps the decisive blow. By 2000 it was virtually inevitable that Argentina would fall into crisis. If the East Asian crisis was the least anticipated of recent crises, the Argentine crisis, like the Russian crisis, was expected. The real question was timing: just when would the crisis hit, and how deep and how extensive would it be? 4 The Argentine Crisis 279 The Financial and Economic Crisis of 2001 During 2001 the crisis that had been simmering exploded into the open, and through-out 2001 and 2002 Argentina sank into a deep financial and economic crisis and an extended political crisis. Political Turmoil and Erratic Policy Decisions There were five changes of president, five ministers of the economy (equivalent to the finance minister in other countries), and two changes of central bank governor during this time. Ricardo Lopez Murphy, a distinguished Chicago-trained macro-economist, lasted just a week as minister of the economy after President Fernando de la Rua refused to back tough fiscal adjustment measures he proposed. 5 Barry Eichengreen compared the crisis in Argentina and Turkey as follows: In these circumstances, a domestic political disturbance that casts a shadow over the prospects for fiscal adjustment and economic adjustment generally could upset the apple cart. . . . In Argentina it was the disintegration of sup-port for the fiscal cuts demanded by [Economy Minister] Jose Luis Machinea and his politically short-lived successor, Ricardo Lopez Murphy.

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