Will big emerging economies be sunk by the global crisis? This column says that they should be able to avoid external payments defaults and systemic banking crises, provided that they allow exchange rates to adjust and refrain from running outsized fiscal deficits.
The IIF forecasts net private capital flows to emerging markets will decline dramatically from $930 billion in 2007 and $470 billion in 2008 to a paltry $170 billion in 2009. Commercial bank lending is forecast to turn negative this year. This “sudden stop” has already forced several emerging markets to request IMF programmes. In addition, exports are collapsing on the back of the global recession. The six largest emerging markets or EM-6 (Brazil, China, India, Korea, Mexico and Russia) have been hit hard. However, they are in a sufficiently strong position to fend off an external solvency and a systemic banking sector crisis (the hallmarks of most of the emerging markets crises of the past 15 years) thanks to manageable foreign currency and foreign liquidity mismatches.
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