Report gives reasons why emerging market economies are in turmoil this week

By Nicel Jane Avellana

Jan 24, 2014 10:52 PM EST

Emerging market economies faced turmoil this week, editors wrote on Bloomberg View. While they did well during the economic crash and afterwards, many of them are seeing their currencies fall and their bonds and securities getting thrashed recently. The global economy seems to be making a recovery but the new source of instability now faced by developing countries threatens to derail it, the report said.

This development was not entirely unexpected as the recession suffered by advanced economies led central banks to drive short-term interest rates to zero. They also had to acquire assets in order to bring down long-term interest rates. Investors turned to emerging market economies in search for better returns. With normal monetary policy resuming, investors' demand for assets in the developing world is bound to decline. The question now is whether it would be a smooth or abrupt transition, the report said.

The issue of capital flow adjustments is further amplified by two things: One is the fact that global capital markets rely heavily on the dollar and as a consequence on the policies put forth by the US Federal Reserve. The second is the mistakes in policy of the closely-monitored developing countries. While nothing much can be done in the short-term about the destabilization caused by the dollar, some of the main emerging market economies can undertake reforms would help keep the calm, the report said.

Burden-sharing is the answer to undue sensitivity to the monetary policy of the US. Other currencies like the euro and the renminbi will eventually have to function together with the US dollar as reserve currencies, the report said.

Governments of emerging markets must also acknowledge that the financial market distress they experienced this was due to their own doing, to various levels. In order to bring back confidence, they can put better policies in place.

The editors concluded, "In this week's financial turmoil, factors beyond their control were in play, but they aren't innocent bystanders, and they aren't powerless."

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