London: Emerging market economies spanning Asia and eastern Europe may suffer a delayed recovery as global recession stalls capital flows from industrialized nations, the Bank for International Settlements (BIS) has said.
There is a significant risk that recovery in emerging market economies will be delayed, the Basel-based BIS said in its 79th annual report released on Monday. In particular, the severity of the downturn could deter a recovery in capital flows which could, in turn, further impair growth.
Emerging economies enjoyed an export-led boom earlier this decade that was strong but unbalanced, the report said. While the boom led to large current account surpluses and high savings ratios in China, locals in central and eastern Europe borrowed in foreign currency, leaving their current accounts in deficit and making them more vulnerable to the credit crisis that engulfed the global economy almost two years ago.
The experience of the 20th century indicates that trade expansion will be needed to bring about a robust global economic recovery, BIS said. However, heavy reliance of emerging market economies on external demand could delay recovery this time. One reason is the unprecedented severity of the import decline in advanced economies.
A number of emerging market central banks have used foreign reserves to support their currencies from sell-offs sparked by the spread of risk aversion. In eastern Europe, reserves were often used to defend currency pegs to the euro.
One concern is that intervention in foreign exchange markets has, in some cases, entailed a very large depletion of foreign reserves, BIS said. Foreign reserves in the first quarter fell to 80% of their June 2008 levels in Korea and India, and were at only 75% of June 2008 levels in Poland and 65% in Russia.
Given the possibility that external shocks could persist, such depletions raise questions about reserve adequacy, the report said. Still, conventional indicators suggest that reserve holdings are still ample.
Central and eastern Europe and West Asia are the only two emerging market regional economies with inadequate reserves to cover short-term external debt, according to the BIS. Still, both regions hold at least 90% of the required reserves, it added. China, by contrast, has almost 19 times the necessary reserves to cover short-term foreign debt.
A severe economic downturn and a delayed recovery in capital inflows could produce future episodes of market instability that could lead to a much faster draining of reserves than suggested by these indicators, BIS said.
Economic growth in the developing world will be 1.2%, the World Bank had said on 22 June. Developing nations in eastern Europe and central Asia will be among the hardest hit, the World Bank said. The region’s economy is likely to shrink 4.7% this year, it said.
The world economy will contract 2.9% this year, as global trade slumps 9.7%, according to the Washington- based bank.