>EM anti-crisis measures (DEUTSCHE BANK)

Separating the wheat from the chaff

Emerging markets have put together sizeable stabilisation and support programmes and other measures to combat the effects of the financial crisis. Looking at the headline figures as announced by the respective governments, the largest packages are in UAE, China, Russia, Kuwait, Hong Kong and Kazakhstan, each amounting to at least 10% of GDP.

There are two main differences between anti-crisis measures in EMs and in developed markets. First, the majority of EM programmes do not contain significant recapitalisation schemes for banks, which to a large extent is due to the relatively good shape of many EM banking sectors. We built a composite index of financial soundness according to which Asian and Latin American banking sectors are faring quite well.

Second, emerging markets have had to fight the EM-specific problem of FX liquidity shortages. When a crisis erupts, typically EM currencies depreciate sharply, creating problems in the balance sheets of governments (less so in recent years) and the private sector. EM governments have reacted by injecting FX liquidity and intervening in the market to contain currency depreciation. This has shown that the amount of FX reserves in relation to external financing requirements is still crucial to the assessment of countries’ resilience to external shocks. From a policy perspective, accumulating FX reserves still seems to be pretty good insurance.

As in the case of developed markets, there is a trade-off between fiscal stimulus and the sustainability of fiscal policy. Given emerging markets’ history of macroeconomic instability, the issue of credibility of policies is especially important for EMs. In terms of their fiscal health at the onset of the crisis, the Gulf countries, Russia, Chile and Hong Kong possessed outstandingly high capacity to implement countercyclical measures.

In recent weeks there have been some signs of stabilisation in financial markets and selected economic data. It is difficult to assess to what extent stimulus packages have played a role (there are indications that this is the case with China). To be sure, the much-enhanced IMF role in providing assistance as well as massive support measures in developed markets have been critical, but the reaction of emerging market governments has been constructive overall, which bodes well for the post-crisis recovery period.

To see full report: ANTI-CRISIS MEASURES