1.
Weekly Commentary
QNB Economics
economics@qnb.com.qa
8 September 2013
Emerging Market Crisis May Derail Global Economic
Recovery, According to QNB Group
The emerging market (EM) crisis currently
underway in Asia and Latin America may derail
the incipient global economic recovery, according
to QNB Group. The financial turmoil unleashed by
the Federal Reserve (Fed) announcement that it
will start tapering its asset-­‐purchasing program
soon—the so-­‐called Quantitative Easing (QE)—
has led to large capital flight from most EM, a large
weakening of their currencies, and higher long-­‐
term interest rates globally. If the Fed starts QE
tapering in its forthcoming meeting on September
17-­‐18 as announced, this is likely to unleash
further EM capital flight, thus undermining their
economic growth and reducing global export
demand. This will inevitably have a knock-­‐on
effect on the relatively weak growth in the US and
the incipient recovery in Europe. Ultimately, QE
tapering may well be self-­‐defeating as it could in
fact lead to lower growth both in the US and the
rest of the world, thus derailing the global
economic recovery according to QNB Group.
On June 19, Fed Chairman Ben Bernanke
announced a tapering of its QE policies contingent
upon continued positive US economic data. This
announcement marked an end to three waves of
QE that have flooded US financial markets since
2009 with an estimated USD2.9trn (19.3% of US
GDP), according to the economic research of the
Federal Reserve Bank of St. Louis. The
opportunities, however, to invest these resources
have been limited in advanced economies given
near-­‐zero interest rates in Europe, Japan, and the
US. Global financial institutions therefore used a
significant portion of this liquidity to invest in EM,
which offered higher returns. This led to higher
EM exchange rates, lower interest rates, and to
some extent higher growth momentum.
Unfortunately, the QE party for EM came to an end
on June 19. As has been the case in previous EM
crises, it pays to be the first one out of the door,
because exchange rates are still high and it is
easier to liquidate large financial investments
when foreign exchange liquidity is still plentiful.
Accordingly, global financial institutions have
rushed to liquidate their EM investments since the
Fed announcement in order to cash in their capital
gains and avoid being faced with policy measures
that could restrict their capital movement. The
result has been a panic selling of EM exchange
rates (Figure 1). The Fed announcement has also
lowered demand for government bonds globally,
thus leading to higher long-­‐term interest rates in
EM and, to a lesser extent, in advanced economies.
This has shaken EM consumer and investor
confidence, which will inevitably lead to lower
economic growth going forward.
EM Central banks have added to the capital flight
by trying to lean against the wind. They have used
their international reserves and raised policy rates
to defend their currencies. Most prominent in this
defense has been the Reserve Bank of India (RBI),
which has witnessed a decline in the Rupee of 14%
since June 19. In response, the RBI has used its
international reserves to defend the Rupee and
tightened liquidity. Restrictions on gold imports
and

2.
Weekly Commentary
QNB Economics
economics@qnb.com.qa
8 September 2013
Figure 1. Emerging Markets Exchange
Rates
(% change against USD)
M alaysia
95
100
105
110
115
120
18-­‐Jun 03-­‐Jul 18-­‐Jul 02-­‐Aug 17-­‐Aug 01-­‐Sep
-
9%
-
4%
-
14
%
-
11
%
-
9%
-
4%
-
14
%
-
11
%
-
9%
-
4%
-
14
%
-
11
%
-
9%
-
4%
-
14
%
-
11
%
-
9%
-
4%
-
14
%
-
11
%
-­‐9%
-­‐4%
-­‐14%
-­‐4%
-­‐11%
C hange
from
Jun
18
India
Brazil
Indonesia
Thailand
Source: Bloomberg
capital account outflows have also been
tightened in order to stem the outflow without
success. At the same time, there are early signs
that the Indian economy is slowing down rapidly,
with the HSBC Purchasing Managers’ Index
indicating the manufacturing sector contracted in
August for the first time since the global economic
crisis of 2009. There is even talk of a possible IMF
credit line to help India weather the storm. Similar
narratives are occurring in other EM, like Brazil,
Indonesia and, to a lesser extent, Malaysia and
Thailand. Overall, the EM crisis resembles in many
aspects the Asia crisis of the late 1990s.
Today’s EM crisis has serious implications also for
advanced economies. Unlike in the 1990s,
advanced economies are today more than ever
dependent on EM for their own growth. China, the
US, Germany and Japan were the world’s largest
exporters in 2012 and an increasing share of their
exports have flown to emerging markets in recent
years. A significant decline in EM growth would
inevitably have a knock-­‐on effect on their own
exports and therefore on their growth momentum.
This comes at a critical time in the global recovery,
where the United States is still showing relatively
weak economic growth and Europe is slowly
coming out of a two-­‐year long recession. A
significant slowdown in EM economic growth
could therefore put in jeopardy the recovery in
advanced economies as well.
Overall, all indicators show that QE tapering may,
at this stage, have negative implications for both
EM and advanced economies. During the Jackson-­‐
Hole meeting in late August, Fed officials have
ruled out taking a global perspective into account
in formulating their QE tapering. According to the
QNB Group, if the Fed does taper now, this will
worsen the EM crisis and may derail the global
economic recovery, including in the US.