Fallout for the emerging market economies

29 June 2009

Emerging market economies initially exhibited a great deal of resilience to the financial crisis. The high degree of economic and financial integration that supported an extended period of rapid growth has left them exposed to sharp reversals in capital flows and declines in demand for their exports. Countries that maintained prudent policies and low public debts, such as those in Asia and parts of Latin America, still have flexibility to respond. However, some countries with large current account deficits, and some where banks were making foreign currency loans, have run into difficulties requiring external official assistance.

Two issues are now of particular concern for emerging market economies: risks that the severity of the downturn could deter a recovery in capital flows and further impair growth; and whether new initiatives to improve access to external finance through official channels could help reduce reliance on costly reserve accumulation.