Emerging Markets Well Prepared for Fed Rate Increase, Say Central Bankers During IMF Panel Discussion

IMF News, October 9, 2016

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Emerging market economies are described as "well prepared" to handle fallout from a Federal Reserve interest rate increase, in contrast to the 2013 "taper tantrum."
Central bankers cited improved readiness through policy adjustments and buffers built since 2013.
Panel participants referenced expectations that the Fed would raise its key rate again "before the end of the year."

Thailand: foreign currency reserves are "three times as large as short-term external debt," providing a "sufficient buffer to deal with short-term, volatile capital flows."
South Africa: has been accumulating foreign currency reserves and uses them to "intervene in currency markets only to smooth volatility and provide liquidity for large transactions, and not to steer the exchange rate."
Colombia: has allowed the currency to float freely since 1999 and has accumulated foreign currency reserves during periods when the peso strengthened.

Bank of Thailand Governor Veerathai Santiprabhob noted the Fed’s latest projections show its target for the federal funds rate is unlikely to rise much more from the current range of "0.25 percent to 0.5 percent," and that markets have "internalized" this.
Lesetja Kganyago, Governor of the Reserve Bank of South Africa, said a Fed interest rate increase could be positive for emerging markets "if it is seen as a sign of U.S. economic strength" because "a strong U.S. economy is good for the world economy."
Panelists agreed the Fed has "improved its communications since 2013," citing clearer signaling around the December rate increase that was the first since 2006.

Flexible or floating exchange-rate regimes helped countries adjust to commodity price shocks:
- South Africa: a decline in world prices of metals coincided with a fall in the rand, cushioning the impact in local currency.
- Russia: adopted a floating exchange rate in late 2014, which "helped the economy adjust quite fast to this shock."
- Colombia: currency float since 1999 aided policy response and reserve accumulation.
Volatility was characterized as "not a problem" when pass-through to inflation is limited and foreign-currency exposures by households and corporates are low.

Central bankers emphasized the need to "identify potential shocks and be prepared to react," noting that "problems can come from any direction," including events such as the surprise vote in Britain to leave the European Union.
Policy approaches highlighted:
- Building and holding adequate foreign currency reserves.
- Allowing exchange rates to float to absorb external shocks.
- Using reserves for smoothing and liquidity rather than targeting exchange rates.
- Clear communications to help markets internalize policy shifts.

Emerging Markets Well Prepared for Fed Rate Increase, Say Central Bankers During IMF Panel Discussion — October 9, 2016.