MikeLigalig.com

by PNA

The International Monetary Fund (IMF) said emerging and developing economies need to rebuild policy space to address shocks from the risk of another downturn in advanced economies.

Chapter 4 dubbed “Resilience in Emerging Market and Developing Economies: Will It Last?” of IMF’s World Economic Outlook (WEO) released October 27, 2012 said resilience of emerging and developing economies “has increased markedly”.

“The past decade was the first time that these economies spent more time in expansion, and had smaller downturns, than advanced economies,” he said.

It traced the longer period of expansion to a combination of “good policies”, which accounts to about three-fifth of the improvement, and lower domestic and external shocks, which accounts for the balance of 40 percent.

It cited as reasons for optimism the “improved policymaking and greater policy space.”

Emerging and developing economies are now less vulnerable to shocks after policy makers in these countries adopted inflation-targeting and flexible exchange rates as well as a more “countercyclical fiscal and monetary policies.

“They also have more room to maneuver, thanks to lower inflation and better fiscal and external positions than in the past,” the report said.

It, however, pointed out that there are “fickle” segments in the optimism such as strong capital inflows, rapid credit growth and high commodity prices.

The report, on the other hand, cited that the “relative calm” in the emerging and developing economies “could well be temporary.”

“There is a significant risk that advanced economies could experience another downturn, and in such an event emerging market and developing economies will likely end up ‘recoupling’ with advanced economies, much as they did during the global financial crisis,” it said.

On the domestic side, concerns on financial stability is up as strong domestic demand goes hand in hand with credit expansion.

“To guard against such risks, these economies will need to rebuild their policy space to respond to shocks,” it said.

“More policy room for maneuver has played a major role in buffering external shocks. To guard against new shocks, these economies will need to rebuild their buffers to ensure that they again have ample space to respond to them,” it said.

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