Swift action needed to curb tapering impact on emerging markets
–Shaukat Aziz is the former prime minister of Pakistan. The opinions expressed are his own.–
Emerging markets have seen increasing economic uncertainty in recent months, due to a slowing down in quantitative easing (QE) and a reduction in economic activity. Several countries have experienced rising current account deficits, reducing capital flows, declining foreign reserves and depreciating currency values. Brazil, India, Indonesia, South Africa and Turkey have all seen their currencies drop by more than 10% this year.
These factors serve to lower consumer and investor confidence and delay new investments – in effect, creating a ‘wait and see’ attitude with the result that discretionary expenditure is deferred.
The need for leadership, bold structural reforms and a backstop liquidity cushion has never been greater. The best time to initiate structural reforms is when an economy is strong, capital flows are healthy and current and fiscal deficits within a comfortable range. However, even for those emerging market countries facing a difficult future, it’s not too late to push through the required economic and structural reforms.
Deregulation does not mean that the government abdicates its responsibilities to protect public interest, rather it helps to create an enabling environment for investment and growth, while reducing red tape and corruption. These are critical to improve people’s quality of life and deliver healthy long term economic growth. No sector is immune from the need for structural reforms, which must be carefully orchestrated and tailor-made for each country’s specific needs. A holistic reform agenda should cover a wide range of policies including economic, administrative, political and social issues.
The liquidity situation for several emerging market countries is under stress and backstop funding may be needed. Several options are available for sovereigns to build up reserves and alleviate cash flow shortages. Markets still have plenty of appetite for emerging market risk if a country can demonstrate good governance, a clear economic strategy and structural agenda.
South Africa and Brazil have recently raised funds from international capital markets and more emerging market countries could follow suit. To do this, a country must be able to clearly articulate its economic objectives and strategy, which should be adapted for local needs. It must do everything it can to maintain its ratings through regular engagement with appropriate agencies and provide all stakeholders, including capital markets, investors and banks, with current and reliable data as well as an updated strategy and plan.
The IMF has a vital role to play in restoring confidence and the time for them to act is now by providing backstop liquidity to countries facing substantial capital outflows and declining reserves. Countries experiencing a decline in liquidity should, where possible, raise funds through capital markets as well as seek funding from regional development banks. The public reassurance that the IMF gives to emerging market countries could ensure that a contagion effect across the global financial system does not occur. The recent G20 summit in Moscow also highlighted the need for more global coordination to provide a funding buffer for these economies.
Fears of a decline in QE have impacted investor confidence globally with hot money being the first casualty. To avoid serious contagion risk, urgent coordinated global action is needed to build confidence and avoid dislocation in markets. The time to act is now.