Emerging market prospects

The US Federal Reserve Board seems on course to start reducing the pace of buying bonds. It will eventually raise interest rates, too. After the financial turmoil this prospect has already caused in recent weeks in several emerging markets, notably in Asia, what does it mean for them as they move forward and what should governments do to mitigate the impact?

In recent years, very low interest rates and quantitative easing (QE) in several high-income countries led to large flows of financial capital into emerging economies, including in Asia, fueling credit growth and raising asset prices.

The tapering off of QE and normalization of US monetary policy could lead to a reversal of part of these flows as US yields rise. Indeed, talk by Fed officials about a possible timeline have since June led to higher US bond yields and in recent weeks to a selloff in the financial markets in several emerging economies, especially in Asia.