Home Today's Paper Most Popular Video Gallery Photo Gallery
Subscription Blog Signin Register
Logo
Wednesday, November 22, 2017 07:08:52 PM
Follow Us On: Facebook Twitter Twitter Twitter Twitter

Emerging markets at risk again

By
11th-Nov-2017       
Comments
Share your thought
Post a comment »
Read all () »

Jomo Kwame Sundaram :
Emerging market governments often draw lessons from previous financial crises - or at least claim to do so - to prevent their recurrence. However, such preventive measures are typically designed to address the causes of the last crisis, not the next one. Hence, some measures adopted may inadvertently become new sources of instability and crisis.
Very rarely are the root causes of crises and vulnerability addressed. In their efforts to prove themselves as worthy emerging markets, they tend to be pro-active in joining the financial globalization bandwagon. But premature financial liberalization - with hasty integration into the international financial system, typically without adequate prudential multilateral mechanisms for speedy and orderly resolution of external liquidity and debt crises - can be very dangerous and costly.
Future currency crises different
Many governments claim to have learnt from the 1997-1998 Asian financial crises and the 2007-2009 global financial crisis. But while measures implemented may be effective in preventing recurrence, they may be inappropriate, inadequate or worse, even counterproductive with changing, deepening financial integration.
After mid-1997, Southeast Asian governments abandoned their informal currency pegs after incurring high costs trying to defend them. Moving to flexible exchange rates ended 'one-way (sure-win) bets' for some speculators, while entailing disruptive currency devaluations.
Since the crises, banking regulation and supervision have undoubtedly improved, e.g., reducing currency and maturity mismatches in bank balance sheets. However, in this day and age, stable exchange rates can no longer be ensured with unregulated capital mobility.
In fact, currency crises can occur with either fixed or flexible exchange rates. With flexible rates, inflows cause currency appreciations, encouraging even more inflows, which will inevitably be reversed, often quite abruptly.
Capital inflows into securities markets are far more important today than banks intermediating cross-border capital flows in the 1990s. Corporate bond issues have also grown much faster than international bank lending, whether directly or through local intermediaries. Yet, such measures have not prevented credit and asset price bubbles.
Emerging markets have further liberalized foreign direct investment (FDI) regimes and encouraged foreign participation in equity markets, presuming that equity liabilities are less risky than external debt. Hence, foreign shares of market capitalization have reached unprecedented levels, much higher than in the US. With emerging markets more susceptible, a little foreign investment can 'make (emerging) markets', causing large price swings.
Currency mismatches
East Asian authorities have also reduced currency mismatches in their own balance sheets and exchange rate risk exposure by opening domestic bond markets to foreigners and borrowing in their own currencies. Consequently, sovereign debt is now much more exposed to foreign creditors than in reserve currency countries.
Much higher shares of most emerging market sovereign bonds are held by foreigners, usually privately, rather than by central banks. In contrast, most of Japan's very high sovereign debt is held by Japanese creditors while around a third of US Treasury bonds are held by non-residents.
Encouraging foreign participation in sovereign bond markets has helped pass currency risk to creditors, but also reduced autonomy over long-term rates and increased exposure to interest rate shocks from abroad, e.g., when the US Fed raises interest rates again.
Greater capital account liberalization besides encouraging domestic corporations to borrow from and invest abroad have resulted in massive debt accumulation in low interest rate reserve currencies, especially with recent 'unconventional' monetary policies. Thus, reducing sovereign debt currency mismatches has been offset by increased private corporate fragility due to greater exchange rate risks.
Regulatory constraints on resident individuals and institutional investors purchasing foreign securities and real estate have also been relaxed. Capital account liberalization has enabled resident capital outflows claiming these will 'balance' foreign inflows. But such private accumulation of foreign assets will not be available to national authorities in case of panicky capital flight.
Hence, national currencies are especially vulnerable when the capital account is open and foreign control of domestic financial assets is significant. As experience has shown, macro-financial volatility may suddenly precipitate massive outflows.
Self-insurance delusion
Since the turn of the century, emerging markets have been seeking 'self-insurance' in managing external balances by accumulating 'adequate' international reserves from trade surpluses and capital inflows. Hence, foreign reserves in most East Asian countries are often enough to meet conventional external liabilities, but not enough to cope with massive reversals of foreign portfolio investments and capital flight by residents.
Despite the crises of the last two decades, emerging markets' capital accounts are much freer now than then. Asset markets and currencies of all East Asian emerging markets with 'enough' foreign reserves have nevertheless been shaken several times in the past decade.
But such short-lived instability episodes did not cause severe damage as they only involved temporary shifts in market sentiments. Nevertheless, they hint at likely threats when 'quantitative easing' in the North could be reversed soon.
As 'self-insurance' is probably insufficient to cope with massive capital flight, the usual option is to 'seek help' from the IMF and reserve-currency countries. Another involves 'bailing in' international creditors and investors using foreign exchange controls, temporary 'debt standstills' and other measures to protect jobs and the economy.
But such unilateral measures may be difficult and costly due to resistance from creditor country governments, acting at the behest of the powerful financial interests involved.
(Jomo Kwame Sundaram, a former economics professor and United Nations Assistant Secretary-General for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007).

Tariff
Add Rate

News Archive

Inside The New Nation

Editorial »

HC verdict is well meaning: Hospitals must appreciate


THE High Court ordered hospitals and clinics not to hold body of a deceased if his or her family fails to immediately pay the medical bill to release the body. It has also asked the Health Secretary and the Director General of the Directorate of Health Services to issue a ...

International »

Putin, Assad for political solution to Syria`s conflict


Reuters, Moscow  :Russian President Vladimir Putin hosted Syrian leader Bashar al-Assad to talk about the need to move from military operations to the search for a political solution to Syria's conflict, the Kremlin said on Tuesday.Russia is actively trying to build an international consensus around a peace deal for Syria, ...

Sports »

A scene from the opening ceremony of the Omicon Group 43rd National A Chess Championship held at Bangladesh Chess Federation hall-room on Tuesday.


Sports »

Sharapova named in India luxury housing fraud probe


AFP, New Delhi :Five-time Grand Slam champion Maria Sharapova is under investigation in India for cheating and criminal conspiracy after the collapse of a luxury housing project that she endorsed, police and a lawyer said Tuesday.The firm behind the development is alleged to have taken millions of dollars from homebuyers ...

Entertainment »

Janhvi dazzles at IFFI in ethnic wear


Janhvi Kapoor who is all set mark her Bollywood debut with Karan Johar’s Dhadak opposite Ishaan Khatter makes a dazzling entry at 48th IFFI 2017 in Goa. Janhvi was accompanied by her mother Sridevi and father Boney Kapoor. Janhvi looked elegant wearing Anamika Khanna lehenga choli. It is probably Janhvi’s ...

City »

Uphold image of Armed Forces: President


President M Abdul Hamid on Tuesday asked the members of Armed Forces to uphold their image at national and international levels by ensuing utmost professionalism. "Uphold the image of the armed forces . . . Help continue the country's ongoing development trend in the days to come," President's Press Secretary ...

Editorial »

Use of toxic tannery wastes in poultry feed


MEDIA reports said an increasing number of poultry feed mills using dangerously toxic tannery wastes laced with poisonous chemicals as raw materials remain the biggest threat to public health. They are moreover flouting is a ban of the High Court for producing and marketing the toxic feed for animals which ...

International »

Putin plan to rejuvenate Russian politics makes slow progress


Reuters, Moscow :Poised to run for a fourth term, President Vladimir Putin has started clearing out the old Russian political elite and says he's bringing in young people with "fire in their eyes."But a Reuters analysis shows that he has made limited progress so far.In the run up to March ...

Sports »

Participants run during the Delhi Half Marathon in New Delhi, India on Sunday. Ethiopia's Birhanu Legese and Almaz Ayana won the men's and women's elite categories, respectively.


Entertainment »

Bollywood congratulates Manushi Chillar on winning Miss World crown


After a wait of 17 long years, Indian model Manushi Chhillar has won the Miss World crown. Since yesterday’s announcement, many Bollywood celebs and public figures have congratulated her on winning the prestigious event. Here are some endearing messages from Bollywood celebs: The Megastar of Bollywood Amitabh Bachchan congratulated Manushi ...

Entertainment »

Runa Khan coming with her first movie


Sheikh Arif Bulbon :Most of her colleagues always appreciate the acting of Runa Khan. There is no other alternative or choice of her in TV plays. So she has acceptability among the directors. Viewers also like her acting. Runa will entertain the viewers by virtue of her acting skill with ...

City »

BNP Chairperson Begum Khaleda Zia cutting cake marking birthday of BNP Senior Vice-Chairman Tarique Rahman at her Gulshan office in the city on the early hours of Monday.


National »

GAFFARGAON: Vice-Chairman of the Central Committee of Muktijodha Sanghati Parishad Major (Retd.) Md Rezaul Karim, a veteran freedom fighter and an Awami League leader addressing a meeting on his participation in the coming National Election as a candidate from Awami League in the election area Mymensingh-10 (Gaffargaon & Pagla PS) Primary School field, Gaffargaon on Friday. Among others, freedom fighter Mofazzal Hossain, Auditor (retd.) Alhaj Abdul Karim and Ex Ward Member Saiful Islam also spoke in the meeting at Charalgi (Nidiar Char) .


Editorial »

Higher production capacity for power plants


THE state-owned power plants can't generate electricity to a minimum of their stated capacity as they lack improved technology, besides management failure to achieve the highest output as per a report in The New Nation on Sunday. The report quoting Bangladesh Power Development Board (BPDB) said its power plants can ...

International »

Hariri announces return to Lebanon as crisis simmers


AP, Paris :Lebanon's Prime Minister Saad Hariri said he will return home in the coming days from where he will declare a political stance for the first time since making a strange resignation announcement from Saudi Arabia that unleashed fears of a crisis in Lebanon.Hariri and his family met Saturday ...

 
Items that you save may be read at any time on your computer, iPad, iPhone or Android devices.
 
Are you new to our website? Do you have already an account at our website?
Create An Account Log in here
Email this news to a friend or like someone
Email:
Write a comment to this news