IMF Executive Board Discusses Study on Emerging Markets’Performance During Global CrisisPublic Information Notice (PIN) No. 10/76
June 21, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
The Executive Board of the International Monetary Fund (IMF) met on June 9, 2010 for a discussion of a staff paper on the performance of emerging markets during the recent global crisis. The crisis had a pronounced, but varied, impact on emerging markets (EMs), with some suffering large output collapses and others less affected. As a result, many countries requested financing support from the Fund, an initial evaluation of which was presented to the Executive Board in a related review. This paper follows up on the Directors’ request for a broader evaluation of how EMs have coped in the crisis, and complements other ongoing work in the IMF on the issue.1
The paper provides a preliminary assessment of EMs’ experience during the crisis. It identifies factors that can explain the extent to which EMs were affected, documents fiscal and monetary policy measures taken during the crisis, explains why some countries recovered earlier than others, and considers challenges facing EMs as they exit from the crisis.
Executive Board Assessment
Executive Directors welcomed the opportunity to draw preliminary conclusions from the experience of emerging market economies during the recent global crisis. They observed that, although the crisis had started in advanced economies, it had a pronounced impact on many emerging market countries, reflecting contagion and spillover effects across countries and economic sectors. Along with improved fundamentals in many of these countries and appropriate use of available policy space, coordinated measures to stimulate growth in advanced economies and the availability of large international financial support, including from the Fund, have helped emerging markets cope with the crisis and paved the way for recovery.
Directors generally shared the main conclusions of the staff report. They observed that the extent of output decline and the pace and timing of the recovery vary considerably across countries. Directors concurred that a whole host of evidence confirms that the following factors indeed explain such differences: pre-crisis fundamentals and vulnerabilities, including international reserve coverage, trade and financial linkages, and policy space and financing constraints. Directors emphasized that, for both advanced and emerging market economies alike, sound policy frameworks and continued efforts to improve economic fundamentals are the first line of defense against future shocks. In this context, Directors highlighted the need to strengthen vulnerability analyses, and the importance of Fund surveillance and policy advice more broadly.
Directors took note of the findings that higher international reserves were associated with less deterioration in both output and sovereign spreads during the crisis, but that the benefits of holding reserves diminish at very high ratios of reserves to short-term debt and the current account deficit. Some Directors considered continued reserve accumulation an effective shock absorber, cushioning the fall in output and providing confidence to markets. In the view of several Directors, further progress in strengthening global financial safety nets could help reduce the need for self-insurance. In this regard, some Directors reiterated their call for further improvements to the Fund’s lending toolkit.
Directors noted that the collapse in economic activity was met by an unprecedented policy response. Countries that entered the crisis with higher primary balances, lower public debt, and more credible monetary policy frameworks were able to react with more aggressive fiscal and monetary stimuli during the crisis. Directors broadly shared the observation that countries with flexible exchange rate regimes could allow the exchange rate to bear part of the adjustment; on the other hand, countries with pegged exchange rates or those perceived by markets to be more risky were constrained in their ability to loosen monetary policy.
Directors noted that the recovery has been uneven across emerging market countries. Those with better pre-crisis fundamentals and those that provided more stimuli during the crisis are recovering faster. Similarly, Directors noted the staff’s finding that countries with flexible exchange rate regimes are generally recovering faster than those with pegs. A few Directors urged caution in drawing any firm conclusion on the advantage of one exchange rate arrangement over the other. Directors acknowledged that recovery across emerging market countries has been helped by, and in turn contributed to, growth in advanced economy trading partners.
Directors cautioned that emerging market countries that entered the crisis with high vulnerabilities generally still have substantial external imbalances and are projected to experience a bigger loss in medium-term output, with significant implications for medium term solvency. For these countries, it would be important to accelerate external adjustment, including through fiscal consolidation where appropriate, and to undertake structural reforms to improve medium-term growth prospects.
Executive Directors saw the risk that fast recoveries may lead to rising capital inflows, closing output gaps, and rising inflation. Raising interest rates when policy rates in major advanced economies remain near historic lows could prompt excessive capital inflows, which could, in turn, fuel asset price bubbles. Thus monetary policy decisions may be constrained in some emerging market countries. Directors noted the staff’s assessment that countries have at their disposal a range of policy options to cope with resurgent capital inflows depending on individual country circumstances: allowing the exchange rate to appreciate, building reserves, easing monetary policy, altering the macro policy mix, implementing macroprudential measures, and, if deemed necessary under certain circumstances, temporary price-based capital controls. The potential distortions and diminishing effectiveness of capital controls over time should nevertheless be taken into account in considering such measures.
Directors offered insightful views and suggestions, which would help shape ongoing work in several important areas, including updating the vulnerability methodology and developing a framework for assessing vulnerabilities in low-income countries. This seminar also provides useful input into the forthcoming papers on reserve adequacy, capital flows, and emerging market spillovers.