Emerging economies need to exercise caution
Fiscal, regulatory and structural policies needed — Kroszner
The rate tightening cycle in the US, although gradual, is expected to impact the economic growth outlook of emerging market economies, transmitted through the inevitable rising cost of funds and tightening of liquidity.
Many emerging market governments and companies borrowed heavily, when rates were ultra-low, in the aftermath of the 2007-2009 Great Recession. As the debts roll over, those borrowers have to refinance at higher rates.
A rising dollar is also making things harder for emerging market borrowers who took out loans denominated in the US currency.
“Fed is aware of the impact of its policy actions on other economies. However, like any other central bank in the world that is created by its own respective legislature, the Fed is mandated to focus on the US economic interests,” Randall S. Kroszner, deputy dean for executive programmes and Norman R. Bobins Professor of Economics at University of Chicago Booth School of Business, told Gulf News in an interview.
External risks
Randall said governments across the world need to exercise caution and be aware of the external risks to their economies. “It is extremely important for governments to have their fiscal house in order. Last year’s turbulences [in the markets] impact on countries varied substantially, on their relative financial strength. It depended a great deal on the level of fiscal deficits, trade deficits and levels of debts,” said Kroszner.
Economies with solid macroeconomic policies proved that they are less vulnerable to policy changes than elsewhere.
“Fed rate increases have revealed the fragilities of many of those countries affected, but a lot has to do with choices those individual countries have made that allowed them to be vulnerable,” he said.
While reminding that the Fed tightening cycle has been a very slow and well anticipated process, Kroszner said most emerging economies had enough time to adjust themselves to the rate cycle.
“It may be a difficult choice to adjust to a change in policies such as a hike in interest rates. However, it is the responsibility of each of these countries to have domestic fiscal regulatory and structural policies to prevent external shocks. No one can blame others for the lack risk management to work with the environment one operates,” he said.