Emerging markets over the last half a year have taken hits but survived, according to the Bank for International Settlements in its “Quarterly Review, March 2014.”
In mid-2013, emerging market currencies sold off as a result of the announced end to the Federal Reserve’s quantitative easing – the so cold “taper.” Then in late 2013 and early 2014, emerging markets were the victims of a subdued growth outlook (also along with continuing US monetary policy, the taper, reduced the flow of easy money).
In the case of the mid-2013 swoon the BIS says that non-deliverable forwards helped emerging markets handle the pressure by reducing the impact on global markets. MNC treasurers, aware of the headaches emerging markets can create, have long utilized NDFs as a handy tool to quickly and easily neutralize a lot of the exchange rate risk they encounter in emerging markets. This was the case in mid-2013.
According to the authors of a BIS report released with the bank’s Quarterly Review, “Non-deliverable forwards: 2013 and beyond,” NDFs helped in a big way in 2013. “Surprisingly, when seemingly impending ‘tapering’ by the US Federal Reserve led investors to reduce their exposures to emerging market bonds, some markets experienced little net selling,” the authors, Robert N McCauley, Chang Shu and Guonan Ma, wrote. “Instead, investors sold local currencies in well-functioning forward currency markets, including NDFs. These served as … the ‘main adjustment valve,’ allowing investors to hedge the currency risk in their bond holdings.”
In the more recent emerging market selloff, policy intervention saved the day, the BIS said. Emerging markets were on shaky ground going into the fall of 2013 and, “coupled with a better outlook in advanced economies and a reduction in easy money from the United States, these developments weakened the appeal of emerging markets to international investors.”
The BIS said there were also growing perceptions that financial risks gathering steam in some areas, “fuelled by political tensions in several countries.” But some of it was real, the BIS said, including the problems in China’s shadow banking and the fact that “expanding balance sheets, the capitalization of both non-financial corporates and banks in emerging market economies had deteriorated.”
But this time central banks intervened, the BIS said. “Policy interventions in emerging market economies bore fruit in February. These interventions stabilized and in some cases boosted emerging market currencies, providing breathing space to local corporates that had increasingly tapped international markets by issuing foreign currency bonds. Likewise, stock indices recovered most of their January losses and credit spreads tightened,” the BIS wrote in its review.