By Rodrigo Campos
NEW YORK (Reuters) -Emerging market economies have become better at weathering major global economic shocks thanks to their credible inflation targeting, improved foreign exchange regimes and strong fiscal guardrails, a study by the International Monetary Fund showed.
External shocks such as the fallout of COVID-19 from 2020 or Russia’s full-scale invasion of Ukraine in 2022 have rocked the global economy and financial markets – events that usually translate into increased pressure on emerging economies that have smaller fiscal buffers and riskier ratings.
But the study, part of the IMF’s World Economic Outlook report, showed that stronger economic policy frameworks and independent central banks have, since the aftermath of the global financial crisis in 2008, helped accelerate growth while pressuring consumer prices lower.
Meanwhile, some positive external conditions like the zero interest rate policy in the United States added to momentum, found the study published Monday as part of the IMF’s World Economic Outlook report.
“While favorable external conditions contributed to this resilience, improvements in policy frameworks played a critical role in bolstering the capacity of emerging markets to withstand risk-off shocks,” wrote the authors of the second chapter, released Monday ahead of the full report next week.
Quantifying the impact of better policies – which are broadly promoted by the fund – by comparing recent shocks to the impact of crises in the late 1990s, the analysis showed better policy added a half a percentage point to growth and reduced inflation by 0.6 percentage points.
“We’re not saying that there is a fantastic turning point (during the global financial crisis) and everything changes,” said Andrea Presbitero, a co-author of the chapter, in an interview. “It’s more of a gradual change.”
In a separate chapter also released Monday, the IMF underscored the importance of deeper domestic capital markets in emerging economies, which have bolstered liquidity. But it warned that disparities persist, with smaller, riskier frontier markets struggling to attract investment compared to more established economies like South Africa and Mexico.
The Fund cautioned against over-reliance on local banks to absorb local debt issuance during stress periods, urging reforms to make debt issuance more transparent and attract diverse investors. Recommendations included improving borrowing systems, strengthening institutions that manage government debt, and making debt issuance more transparent and on a schedule.
(Reporting by Rodrigo Campos in New York; editing by Karin Strohecker and Hugh Lawson)
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