IMF Says Impact of Emerging Markets' Shocks Rising

Doha, April 05 (QNA) - A new International Monetary Fund (IMF) report says over a third of the variation in asset returns of other countries is because of the substantial increase in spill over from emerging equity and foreign exchange markets. Authors of IMF's Global Financial Stability Report (GFSR) say, "Trade and financial integration of emerging market economies into the global economy and financial system has increased significantly over the past two decades." Emerging market economies have contributed more than half of global growth over the past 15 years, and their share in global GDP has risen to 38%. As a result, spillovers of emerging market shocks to equity prices and exchange rates in advanced and emerging market economies have risen substantially. Bond market spillovers, however, do not display a corresponding trend, since they continue to be driven largely by global factors, the report says. The rise in financial market integration has catalysed spillovers across countries. More than its economic size, the degree of financial integration matters for a country's importance as a receiver and transmitter of spillovers. The report opines, spillovers tend to occur more between countries with similar macro-financial fundamentals. Cross-country spillovers are strongest within sectors. Sectors that are more dependent on external finance are more subject to spillovers, as are firms with lower liquidity and higher borrowing. Purely financial contagion effects remain less significant in the case of China. However, the impact of shocks to economic fundamentals, such as news about China's growth, on equity returns in both emerging market and advanced economies has been rising. China's spillovers to global financial markets will likely increase considerably in the next few years. Structural changes in financial markets, notably the growth in mutual fund intermediation of capital flows, appear to have increased the importance of the portfolio channel of contagion from emerging markets, the IMF report says. These findings suggest that when assessing macro-financial conditions, policymakers may increasingly need to take into account economic and policy developments in emerging market economies. As China's role in the global financial system continues to grow, clear and timely communication of its policy decisions, transparency about its policy goals, and strategies consistent with their achievement will be ever more crucial. The report recommends shaping macroprudential surveillance and policies to contain systemic risks arising from these channels. (QNA)