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Investing in emerging markets has never been boring. Recent market volatility has spawned various comments on the future of the asset class as a whole. Stronger fundamentals have made emerging markets more resilient and safer places to invest. But the challenging external environment and imminent tapering by the Fed is exposing some of the weak spots of EMs. The adjustment of relative prices is a necessary condition for the rebalancing that is required. However, there are risks that the correction goes too far and the asset class falls into a vicious cycle.
The IMF played a key role during the acute phase of the crisis in 2009, in essence helping innocent bystanders from getting into this sort of bad equilibrium. It should again stand ready to help emerging economies to prevent the current market adjustment from becoming a generalised balance of payments and financial crisis in some countries. A lot of effort and resources have gone in the design of new precautionary instruments at the Fund. This is the ideal time to put them to work."
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