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RISI VIEWPOINT: Emerging market turmoil

BEDFORD, MA , Jan. 30, 2014 (Viewpoint) - 

Emerging markets have come under some pressure in the past few weeks, prompting a sell-off in their currencies and raising fears of a crisis and contagion. The main culprits this time are Argentina and Turkey, although others have also been affected. The question is how and whether this turmoil in the emerging markets will spread to impact the advanced economies.

There are a number of causes for the troubles that these emerging markets are experiencing, the first of which is the US Federal Reserve's decision to taper its quantitative easing program. According to an IMF study, the Federal Reserve's quantitative easing program led to $470 billion dollars of inflows to the emerging markets that would otherwise not have occurred, supporting growth and their currencies. However, as the Fed has started to scale back its asset purchases, capital inflows to these developing economies have diminished or actually become outflows. This has caused currencies of emerging market countries, especially the ones most exposed to changes in capital flows, to depreciate dramatically (Figure 1).

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This article originally appeared on woodbiomass.com: RISI VIEWPOINT: Emerging market turmoil