Stronger policies help emerging markets withstand global shocks, IMF study shows

Emerging market economies have become better at weathering global economic shocks thanks to their credible inflation targeting, improved foreign exchange regimes and strong fiscal guardrails, an IMF study shows.

External shocks such as the fallout of Covid-19 from 2020 and Russia’s full-scale invasion of Ukraine in 2022 have rocked the global economy and financial markets, events that usually translate into increased pressure on emerging economies, which have smaller fiscal buffers and riskier ratings.

The study, part of the IMF’s World Economic Outlook report, shows the stronger economic policy frameworks put in place in the aftermath of the global financial crisis in 2008, as well as independent central banks, have helped accelerate growth while keeping consumer prices in check.

Some positive external conditions such as the zero-interest rate policy in the US added to momentum, according to the IMF’s report on Monday.

“While favourable external conditions contributed to this resilience, improvements in policy frameworks played a critical role in bolstering the capacity of emerging markets to withstand risk-off shocks,” write the authors of the second chapter, released on Monday ahead of the full report next week.

Quantifying the effects of better policies, which are broadly promoted by the IMF, by comparing recent shocks to the impact of crises in the late 1990s, the analysis shows better policy added a half-a-percentage point to growth and reduced inflation by 0.6 percentage points.

“We’re not saying that there is a fantastic turning point [after the global financial crisis] and everything changes,” said Andrea Presbitero, a co-author of the chapter, in an interview. “It’s more of a gradual change.”

In a separate chapter also released Monday, the IMF underscored the importance of deeper domestic capital markets in emerging economies, which have bolstered liquidity.

But it warned that disparities persist, with smaller, riskier frontier markets struggling to attract investment compared with more established economies such as SA and Mexico.

The IMF cautioned against overreliance on local banks to absorb local debt issuance during stress periods, urging reforms to make debt issuance more transparent and attract diverse investors.

Recommendations included improving borrowing systems, strengthening institutions that manage government debt, and making debt issuance more transparent and on a schedule.

Reuters