Baku, Azerbaijan, Oct. 11
Trend:
Emerging market economies are well prepared to handle any fallout from a Federal Reserve interest rate increase, in contrast to the situation in 2013, when they were caught off guard by currency volatility during the so-called “taper tantrum,” say several countries’ central bankers.
“Countries such as Thailand have built up large foreign currency reserves, which will help them absorb outflows of capital that could result from a tightening of Fed policy,” said Bank of Thailand Governor Veerathai Santiprabhob in a panel discussion on “Emerging Markets' Response to Recent Exchange Rate Pressures” during the IMF-World Bank Annual Meetings in Washington DC.
“In Thailand, foreign currency reserves are three times as large as short-term external debt,” he said.
The Fed’s latest projections show that 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, added Santiprabhob.
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 US economic strength.
“A strong US economy is good for the world economy,” he said. “So we would benefit from that.”
The so-called "taper tantrum" of 2013 occurred when then Chairman Ben S. Bernanke signaled that the Fed might soon start reducing, or tapering, its purchases of bonds, which it had been using to suppress long-term interest rates. As a result, investors pulled money out of emerging markets and bought US assets in expectations of higher yields, sending the dollar higher.
At the panel discussion, central bankers agreed that the Fed has improved its communications since 2013, helping to prepare market participants for shifts in policy, such as the decision last December to raise the federal funds target for the first time since 2006.
More broadly, panelists said, emerging market central banks have adopted policies that have helped their countries absorb external shocks, such as the plunge in prices of oil and other commodities.
The situation was similar in Russia, which adopted a floating exchange rate in late 2014, said Ksenia Yudaeva, first deputy governor of the Bank of Russia.
“It helped the economy adjust quite fast to this shock,” she said.
Such policies have helped emerging market central bankers deal with any eventuality, such as Brexit – the surprise vote in Britain this summer to leave the European Union.
“Problems can come from any direction,” Yudaeva said. “Our job is to identify potential shocks and be prepared to react.”