Emerging markets at risk, says IMF |
|
The vulnerability of emerging markets to the knock-on effects of the financial crisis in the West should not be underestimated, the International Monetary Fund has warned.
In its report released yesterday, the IMF examined the equity markets in the emerging markets countries to assess the extent to which external, international and domestic as well as fundamental factors drive equity market valuations.
It confirmed that global factors are important in explaining the movement in emerging markets' equity prices as are domestic fundamentals. Using various measures of correlation, the Global Financial Stability Report found that the scope for spillovers to emerging equity markets has risen, suggesting a growing transmission channel for equity price movements.
This can, in turn, affect consumption and investment in emerging markets, although such macro-financial linkages are found to be small and they tend to play out gradually. Nonetheless, the report suggests that policymakers need to remain engaged over the longer term in building resilience in their local financial markets.
Until recently, emerging markets had appeared resilient to spillovers from mature markets. But in recent weeks that has changed. Capital outflows have intensified, leading to tighter external and, in some cases, domestic liquidity conditions. The problems were more serious in those economies with leveraged banking systems and corporate sectors that rely on international financing.
Although "decoupling" - the notion that emerging markets' dependence on mature economies has declined - had faded from most economists' vocabularies, some held out hope that this time the emerging markets would not succumb. It is true that emerging economies have made progress on a number of fronts.
Overall, they have higher fiscal balances, less sovereign debt, more foreign exchange reserves, better policy making structures and healthier economies. Many of these improvements are related to the recent commodity price boom.
Nonetheless, the linkages to global markets and economies have continued to grow and these have begun to overwhelm the improved domestic fundamentals.
And although many emerging economies made fiscal and financial improvements, others remain vulnerable.
The report highlights the reasons some countries may be at particular risk - for instance those dependent on terms-of-trade improvements or external credit.
Emerging European economies have relied on credit supplied by foreign banks or foreign investors through the issuance of local bank bonds abroad.
This latter source has dried up and even though foreign banks say they remain committed to their subsidiaries in these countries, if funding conditions in their home country become difficult they may have little choice but to slow their credit extension abroad as well as at home.
Financial institutions have been shedding bad assets, reducing borrowing and seeking new capital, but strains on the system intensified dramatically in mid September following the collapse or near-collapse of several key institutions.
Confidence in financial institutions and markets has been badly shaken by the global credit turmoil that has its roots in the United States sub-prime mortgage market but that has spread globally to other financial sectors.
The report said risks in a number of areas have risen, especially credit risk, and market and liquidity risks.
According to IMF, financial institutions' losses continue to mount, and unless they receive sufficient capital infusions, the viability of some of them is uncertain.
The IMF report estimates that losses on US-based loans and securities may rise to some $1.4 trillion (Dh5.14trn) - a significant increase from the estimate of $945 billion in the April 2008 Global Financial Stability Report. While roughly $560bn of the losses had already been realised through end-September 2008, bank share prices have continued to plummet and their revenue prospects have stalled.
Raising new capital has become much harder, making it much more difficult for banks to repair their aching balance sheets.
The most serious risk is an intensifying adverse feedback loop between the financial system and the real economy - in which financial institutions' distress leads to impaired credit intermediation and slower economic growth, which in turn leads to further credit deterioration, it said.
The Global Financial Stability Report - using forecasts from the IMF's World Economic Outlook - projects that credit growth in the United States, the euro zone, and the United Kingdom will slow to near zero over the next year before picking up again in 2010.
Public resources will thus be needed to ensure a return to financial stability and a more orderly deleveraging process that avoids a severe credit crunch.
It said with financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures are required to restore confidence in the global financial system.
"Failure to do so could usher in a period in which the ongoing deleveraging process becomes increasingly disorderly and costly for the real economy," it said.
In a statement, IMF Managing Director Dominique Strauss-Kahn said credit deterioration is spreading to more sectors and countries and also warned about the consequences of failing to act decisively on the financial turmoil.
"The report shows how serious a crisis we currently face," Strauss-Kahn said. "The time for piecemeal solutions is over. I therefore call on policymakers to urgently address the crisis at a national level with comprehensive measures to restore confidence in the financial sector. At the same time, national governments must closely co-ordinate these efforts to bring about a return to stability in the international financial system."
Pressing three-part solution to the crisis, Strauss-Kahn gave some guidelines that can help to bolster confidence in financial institutions and markets.
These are: developing an approach to break the downward spiral of disorderly deleveraging - taking illiquid and impaired assets from banks; injecting capital into viable institutions suffering unduly from incorrect market perceptions; and aiding dysfunctional funding markets get back to normal.
However, while financial institutions need to raise more capital - an estimated $675bn - they cannot do so under current conditions. Some potential investors stepped forward earlier, but now are reluctant.
Current business models and revenue streams are more uncertain because mortgage securitisation has nearly halted, making private capital investments in banks more chancy.
Without the ability to obtain new capital from private markets, recapitalisation using the public sector balance sheet should now be considered, as solvency concerns have led to a seizing up of interbank funding markets, says the report.
"A comprehensive approach, if consistent among countries, should be sufficient to restore confidence and the proper functioning of markets and avert a more protracted downturn in the global economy," said Jaime Caruana, Director of the IMF's Monetary and Capital Markets Department.
"We believe that a more resilient financial system will ultimately emerge from the restructuring and deleveraging process that is under way," he added.
Five principles for restoration
Five principles that could form the basis for financial restoration:
Employ measures that are comprehensive, timely, and clearly communicated. They should encompass the principal challenges arising from the strains of deleveraging. These are improving funding availability, cost, and maturity to stabilise balance sheets; injecting capital to support viable institutions with sound underpinnings that are currently unable to provide adequate credit; and buttressing troubled assets by using public sector balance sheets to promote orderly deleveraging. In applying existing or new regulations, authorities should avoid exacerbating procyclical effects. The operational procedures should be transparent.
Aim for a consistent and coherent set of policies to stabilise the global financial system across countries in order to maximise impact while avoiding adverse effects on other countries.
Ensure rapid response on the basis of early detection of strains. This requires a high degree of co-ordination within each country, and in many cases across borders, and a framework that allows for decisive action by potentially different sets of authorities.
Assure that emergency government interventions are temporary and taxpayer interests are protected. Accountability of government actions is important for all stakeholders and the conditions for support should include private participation in downside risks and taxpayer participation in upside benefits.
Intervention mechanisms should minimise moral hazard, while recognising the exigency of the situation and the need for public support.
Pursue the medium-term objective of a more sound, competitive, and efficient financial system.
Achieving this objective requires both a resolution of nonviable financial institutions and a strengthening of the international macro-financial stability framework to help improve supervision and regulation at the domestic and global levels, as well as mechanisms to improve the effectiveness of market discipline.
By Karen Remo-Listama
© Emirates Business 24/7 2008
x
DISCLAIMER
Zawya is a distributor (and not a publisher) of content supplied by third parties and subscribers. Any opinions, advice, statements, services, offers, or other information or content expressed or made available by those third parties, including information providers, subscribers or other users of the Service, are those of the respective author(s) or distributor(s) and not of the Company. The Company neither endorses nor is responsible for the accuracy or reliability of any opinion, advice or statement made on the Service by anyone other than authorized Service employee spokespersons while acting in their official capacities. The Company is not responsible for any infringement of intellectual property rights or breach of any applicable law or regulation, including regulation in relation to financial services or the distribution of financial products, defamation, data protection, telecommunications (including regulations relating to excessive use, spamming or other abusive activities) or obscene, offensive or illegal content). Under no circumstances will the Company be liable for any loss or damage caused by a member's reliance on information obtained through the Service. It is the responsibility of member to evaluate the accuracy, completeness or usefulness of any information, opinion, advice or other content available through the Service. Please seek the advice of professionals, as appropriate, regarding the evaluation of any specific information, opinion, advice or other content.
Read the full Member Agreement
http://www.zawya.com/legal/NewsLetter.cfm?name=disclaimer
Zawya is a distributor (and not a publisher) of content supplied by third parties and subscribers. Any opinions, advice, statements, services, offers, or other information or content expressed or made available by those third parties, including information providers, subscribers or other users of the Service, are those of the respective author(s) or distributor(s) and not of the Company. The Company neither endorses nor is responsible for the accuracy or reliability of any opinion, advice or statement made on the Service by anyone other than authorized Service employee spokespersons while acting in their official capacities. The Company is not responsible for any infringement of intellectual property rights or breach of any applicable law or regulation, including regulation in relation to financial services or the distribution of financial products, defamation, data protection, telecommunications (including regulations relating to excessive use, spamming or other abusive activities) or obscene, offensive or illegal content). Under no circumstances will the Company be liable for any loss or damage caused by a member's reliance on information obtained through the Service. It is the responsibility of member to evaluate the accuracy, completeness or usefulness of any information, opinion, advice or other content available through the Service. Please seek the advice of professionals, as appropriate, regarding the evaluation of any specific information, opinion, advice or other content.
Read the full Member Agreement
http://www.zawya.com/legal/NewsLetter.cfm?name=disclaimer
Community Comments (0) - 
Comment on this article 
Comment on this article
The opinions of the authors expressed herein do not necessarily state or reflect Zawya. Read our Comment Policy.
Loading ...
Zawya Comment Policy:
-
Zawya encourages you to add a comment to this discussion. You agree that when you add content to this discussion your comments will not:
1.1 Contain any material which is libelous or defamatory of any person, is obscene, offensive, hateful or inflammatory or causes damage to the reputation of any person or organisation.
1.2 Promote sexually explicit material, violence, discrimination based on race, sex, religion, nationality, disability, sexual orientation or age or any illegal activity.
1.3 Be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence.
1.4 Be threatening, abuse or invade another's privacy, or cause annoyance, inconvenience or needless anxiety.
1.5 Be used to impersonate any person, to misrepresent your identity or affiliation with any person, or be likely to deceive any person.
1.6 Give the impression that they represent Zawya.
1.7 Advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse. - The content posted on www.zawya.com is created by members of the public. The views expressed are theirs and unless specifically stated are not those of Zawya. Zawya reserves the right to review all comments prior to posting and edit or delete any contribution, but Zawya is not responsible for and can not be held liable for any content posted by members of the public on www.zawya.com.
- Zawya is not responsible for the availability or content of any third party sites that are accessible through www.zawya.com. Any links to third party websites from www.zawya.com do not amount to any endorsement of that site by Zawya and any use of that site by you is at your own risk.
- By submitting your comment, you hereby give Zawya the right, but not the obligation, to post, air, edit, exhibit, telecast, webcast, re-use, publish, reproduce, use, license, print, distribute or otherwise use your comments worldwide, in perpetuity.
Community Buzz
Stories
Companies
Most viewed companies by Community in the last 24 hrs
| Company Name | Country | Industry |
| Consolidated Contractors Company | Overseas | Construction and Design |
| Saudi Telecom | Saudi Arabia | Telecommunications Services |
| Zuhair Fayez Partnership Consultants | Saudi Arabia | Construction and Design |
| Saudi Binladin Group | Saudi Arabia | Construction and Design |
| Ministry of Health - Saudi Arabia | Saudi Arabia | Ministries and Municipalities |
| Hyundai Engineering and Construction Company - Saudi Arabia | Saudi Arabia | Construction and Design |
| Dubai Electricity and Water Authority | UAE | Electric Utilities |
| Oman Insurance Company | UAE | Insurance |
| Saudi Electricity Company | Saudi Arabia | Electric Utilities |
| Al Jaber Group - UAE | UAE | Construction and Design |
Projects
Most viewed projects by Community in the last 24 hrs
| Project Name | Country | Sector |
| ADNOC/ConocoPhillips - Sour Gas Fields Development - Shah Field | UAE | Oil and Gas |
| ENEC - Nuclear Power Plant | UAE | Power and Water |
| Takreer - Ruwais Refinery Expansion | UAE | Oil and Gas |
| SATORP - Jubail Refinery and Petrochemical Complex | Saudi Arabia | Oil and Gas |
| Abu Dhabi Ports Company - Khalifa Port and Industrial Zone (KPIZ) | UAE | Infrastructure |
| Aramco/Dow Chemical - Ras Tanura Integrated Refinery and Petrochemicals Complex | Saudi Arabia | Oil and Gas |
| Qatar Foundation - Sidra Medical and Research Center | Qatar | Real Estate |
| IGD - Gasco - Habshan 5 Gas Processing Plant | UAE | Oil and Gas |
| Emirates Aluminium (EMAL) - Smelter Complex - Phase 1 | UAE | Industry |
| Abu Dhabi DOT - Abu Dhabi Metro | UAE | Infrastructure |