Tapering by the Federal Reserve- Developing Economies Face Risk
Quantitative easing was introduced by the Federal Reserve in the United States in 2008 during the peak of the financial crisis that struck not just America but subsequently the rest of the world. After this there has been a slow and steady recovery and progress in the U.S economy. Earlier this year the Federal Reserve in the United States decided that they would start tapering the bond purchase program which created a massive negative impact in the world economy especially the emerging market economies. The decision about tapering the bond purchase program was stopped in September, but this year has been particularly difficult for emerging market economies or developing markets all over the world.
Difficult Year for Developing Economies
This year, many developing market economies have had to face a difficult year. Some of the world’s emerging markets include China, India, Brazil, South Africa, Russia, Indonesia, Turkey, South Korea and Mexico. Many of the economies are facing a slowdown in their GDP rates and also many of the economies are facing a sharp decline of their currencies against the U.S dollar. In some countries there has been a double digit drop in the rates of certain developing market economy currencies against the dollar.
The dollar this year is strengthening in comparison to other currencies as there is a weak market sentiment for these economies which has resulted in volatile capital inflows into these markets. As growth figures in the U.S improve and these markets seem volatile to investors, there has been a dumping of the government bonds in these countries by the investors who are looking to invest in the U.S again. This has resulted in the Federal Reserve to announce a tapering of the bond purchase program which also caused panic in the emerging market economies in the world.
At one time during this year currencies of countries like Brazil, India, South Africa and other emerging market economies were in a free fall against the dollar. But after the announcement that all plans for the tapering of the bond purchase program have been put on the hold, these currencies have since then stabilized to some extent. As growth rates in these economies are forecasted to be much lower than what is expected, these economies are vulnerable to global economic policy decisions and changes. As developed economies like U.S will eventually strengthen, these economies face the risk when tapering of the bond purchase program is eventually started again by the Federal Reserve in the United States.