Bank for International Settlements
Resilience in emerging markets: what makes it, what could shake it?

Emerging market economies overcome better than expected the US rate hike cycle

The Bank for International Settlements (BIS) released a paper analyzing the performance of emerging markets economies (EMEs) in the context of the monetary policy tightening experienced in advanced economies. The main conclusion is that based on historical antecedents, the exceptionally sharp tightening of monetary policy in the post-pandemic inflationary surge could have been expected to lead to significant stress and dislocation on EMEs, however this group of countries have shown economic resilience due to structural changes, including improvements in monetary and fiscal policy and in prudential regulation and supervision.

Main highlights:

  • The frequency of financial crises in EMEs has declined over time as well as relative to that in their advanced economy peers. A set of structural factors can explain the big difference between the episodes of monetary tightening in advanced economies and their disruptive impact on EMEs in the 1980s and 1990s and the more favorable experience that has occurred since 2000.

  • Structural improvements contributing to EME resilience: 

    • Better monetary policy frameworks: Monetary policy has become more transparent, enhancing credibility among market participants. As a result, inflation expectations have become more stable and the pass-through of the exchange rate to inflation has declined.

    • Stronger prudential regulation and supervision: Prudential measures have been widely deployed over the past two decades resulting in higher bank capital ratios, helping to strengthen the banking system’s resilience.

    • Improved fiscal policy frameworks; although progress on this front has been uneven and the much higher debt levels and wider deficits remain a possible Achilles heel going forward.

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