IMF Identifies Reasons For Markets’ Resilience


By Anita Hawser


Rosy future: Emerging hubs such as Mumbai recovered fast

As the dust continues to settle following the recent global financial crisis, the International Monetary Fund is attempting to explain why so many emerging economies came through the crisis relatively unscathed. While many observers expected the spillover of the crisis from the West into the developing world to lay to rest the whole theory of decoupling, the IMF contends that it did no such thing.

According to a newly released a white paper by the IMF’s strategy department, recovery from the crisis was quicker in those emerging markets that provided greater fiscal stimuli and already had the right fundamentals in place before the crisis began. “Prior progress was rewarded,” says the IMF. The organization identified three stages of “transmission” of the crisis to emerging markets. First, it says, there were signs of “decoupling” from advanced economies between the start of the crisis and the collapse of Lehman. Until a few weeks before Lehman’s bankruptcy, stock markets in low and medium vulnerability emerging markets were 15% below August 2007 levels. But the drop was even bigger in advanced economies and highly vulnerable emerging markets, some of which fell by 30%. The second stage entailed “re-coupling,” as the collapse of Lehman triggered a global panic that affected all markets. The third stage is what the IMF terms “re-decoupling,” which means a gap opened up between highly vulnerable countries whose stock markets remained depressed and less vulnerable markets, which recovered to pre-crisis levels.

Those emerging markets that entered the crisis with a high level of vulnerability will need to make further adjustments to sustain their recovery, the IMF says.  And those countries that were less vulnerable going into the crisis may be constrained from withdrawing fiscal stimuli, it says, as a result of more accommodative policies in advanced economies. That means prudential measures may be needed to deal with surges in capital inflows.