NEW YORK – The
prospect that the US Federal Reserve will start exiting zero policy
rates later this year has fueled growing fear of renewed volatility in
emerging economies' currency, bond, and stock markets. The concern is
understandable: When the Fed signaled in 2013 that the end of its
quantitative-easing (QE) policy was forthcoming, the resulting "taper
tantrum" sent shock waves through many emerging countries' financial
markets and economies.
Indeed, rising
interest rates in the United States and the ensuing likely rise in the
value of the dollar could, it is feared, wreak havoc among emerging
markets' governments, financial institutions, corporations, and even
households. Because all have borrowed trillions of dollars in the last
few years, they will now face an increase in the real local-currency
value of these debts, while rising US rates will push emerging markets'
domestic interest rates higher, thus increasing debt-service costs
further.
But, although the
prospect of the Fed raising interest rates is likely to create
significant turbulence in emerging countries' financial markets, the
risk of outright crises and distress is more limited. For starters,
whereas the 2013 taper tantrum caught markets by surprise, the Fed's
intention to hike rates this year, clearly stated over many months, will
not. Moreover, the Fed is likely to start raising rates later and more
slowly than in previous cycles, responding gradually to signs that US
economic growth is robust enough to sustain higher borrowing costs. This
stronger growth will benefit emerging markets that export goods and
services to the US.
Another reason not to
panic is that, compared to 2013, when policy rates were low in many
fragile emerging economies, central banks already have tightened their
monetary policy significantly. With policy rates at or close to
double-digit levels in many of those economies, the authorities are not
behind the curve the way they were in 2013. Loose fiscal and credit
policies have been tightened as well, reducing large current-account and
fiscal deficits. And, compared to 2013, when currencies, equities,
commodity, and bond prices were too high, a correction has already
occurred in most emerging markets, limiting the need for further major
adjustment when the Fed moves.
Above all, most
emerging markets are financially more sound today than they were a
decade or two ago, when financial fragilities led to currency, banking,
and sovereign-debt crises. Most now have flexible exchange rates, which
leave them less vulnerable to a disruptive collapse of currency pegs, as
well as ample reserves to shield them against a run on their
currencies, government debt, and bank deposits. Most also have a
relatively smaller share of dollar debt relative to local-currency debt
than they did a decade ago, which will limit the increase in their debt
burden when the currency depreciates. Their financial systems are
typically more sound as well, with more capital and liquidity than when
they experienced banking crises. And, with a few exceptions, most do not
suffer from solvency problems; although private and public debts have
been rising rapidly in recent years, they have done so from relatively
low levels.
In fact, serious
financial problems in several emerging economies – particularly oil and
commodity producers exposed to the slowdown in China – are unrelated to
what the Fed does. Brazil, which will experience recession and high
inflation this year, complained when the Fed launched QE and then when
it stopped QE. Its problems are mostly self-inflicted – the result of
loose monetary, fiscal, and credit policies, all of which must now be
tightened, during President Dilma Roussef's first administration.
Russia's troubles,
too, do not reflect the impact of Fed policies. Its economy is suffering
as a result of the fall in oil prices and international sanctions
imposed following its invasion of Ukraine – a war that will now force
Ukraine to restructure its foreign debt, which the war, severe
recession, and currency depreciation have rendered unsustainable.
Likewise, Venezuela
was running large fiscal deficits and tolerating high inflation even
when oil prices were above $100 a barrel; at current prices, it may have
to default on its public debt, unless China decides to bail out the
country. Similarly, some of the economic and financial stresses faced by
South Africa, Argentina, and Turkey are the result of poor policies and
domestic political uncertainties, not Fed action.
In short, the Fed's
exit from zero policy rates will cause serious problems for those
emerging market economies that have large internal and external
borrowing needs, large stocks of dollar-denominated debt, and
macroeconomic and policy fragilities. China's economic slowdown,
together with the end of the commodity super-cycle, will create
additional headwinds for emerging economies, most of which have not
implemented the structural reforms needed to boost their potential
growth.
But, again, these
problems are self-inflicted, and many emerging economies do have
stronger macro and structural fundamentals, which will give them greater
resilience when the Fed starts hiking rates. When it does, some will
suffer more than others; but, with a few exceptions lacking systemic
importance, widespread distress and crises need not occur.
Nouriel Roubini, a professor at NYU's Stern School of Business and
Chairman of Roubini Global Economics, was Senior Economist for
International Affairs in the White House's Council of Economic Advisers
during the Clinton Administration. He has worked for the International
Monetary Fund, the US Federal Reserve, and the World Bank.
- in Project Syndicate
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
