International Monetary Fund managing director Christine Lagarde warned that emerging markets may face another period of economic instability when the United States raises interest rates this year.
The IMF chief said she feared a repeat of the crisis that hit developing economies such as India and Turkey in 2013, when then Federal Reserve chairman Ben Bernanke indicated an early end to the US central bank’s bond purchasing program known as quantitative easing, the Financial Times reported.
“I am afraid this may not be a one-off episode,” Lagarde said in a speech in Mumbai on Tuesday, referring to the capital flight and rapid currency depreciation experienced by many emerging economies as a result of the QE “tapering”.
“The timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets,” she said.
Fed chairwoman Janet Yellen is expected to signal an end to the Fed’s policy of low-rates guidance on Wednesday, with global investors bracing for an initial rise in US rates as early as June, the newspaper said.
Developing economies have seen a surge in capital from the industrialized world over recent years, receiving US$4.5 trillion or half of the global fund flows from 2009 to 2012, according to IMF data.
Lagarde said emerging economies also faced a risk from the recent strength of the US currency as companies that took advantage of low rates to borrow in dollars will face sudden and steep jumps in debt servicing costs.
In India, she said, dollar-denominated corporate debt has risen “very rapidly, nearly doubling in the last five years” to US$120 billion.
“The appreciation of the US dollar is also putting pressure on balance sheets of banks, firms, and households that borrow in dollars but have assets or earnings in other currencies,” Lagarde added.
The IMF chief urged emerging-market governments to enact economic reforms to raise growth, improve their current account positions and gradually liberalize financial markets.
Central banks must also prepare emergency measures in case they need to ease pressure on currencies and support companies struggling with debt repayments, she said.
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