R.Kannan from the Hinduja Group presented on trends in emerging market economies and financial markets. He noted that in August 2014, emerging markets received $9 billion in inflows, down sharply from an average of $38 billion per month in the prior months. This was primarily due to a reversal of flows to emerging Europe and Africa, as well as a slowdown to emerging Asia and Latin America. He discussed various trends including the increased global integration of financial markets, the impact of monetary policy actions by advanced economies, and the growing role of emerging markets in the global economy. Kannan also outlined various transmission channels, spill over effects, financial instruments, and strategies that emerging markets can employ to manage challenges in volatile financial

1. Emerging Economies and
Financial Markets
R.Kannan
Hinduja Group
11th September 2014
Global Economic Summit 2014
Mumbai

2. Flow of the Presentation
• Trends
• Transmission Channels and Management
• Spill over Effects
• Financial Instruments
• Strategies and Policies in Challenging Times

3. Trends

4. August 2014 flows
• EMs received a mere $9 billion in August, after an
average of $38 billion per month in May-July.
• Portfolio debt inflows were particularly affected,
grinding to a halt in August.
• a reversal in portfolio flows to EM Europe (-$7.3 bn)
and Africa (-$1.5 bn), and a slowdown in flows to Asia
($9.7 bn) and Latin America ($8.3 bn).
 Sharp slowdown in August primarily reflected a
reversal of portfolio flows to Emerging Europe and
Africa, as well as a decline in flows to EM Asia and
Latin America.

5. Portfolio Inflows to Emerging Markets
Slow Sharply in August

6. Trends
• There is a greater global integration today of financial markets.
• The Monetary action taken by Advanced countries especially US has a
great bearing on financial flows to emerging markets.
• After the crisis there is positive correlation in yield in AMs and EMs.
• Similar trend was observed in Asset prices
• Unconventional Monetary policies benefitted the EM’s more than the
home countries.
• Even signals on likely action from AM’s have a great bearing on Financial
markets in EMs.
• Responses around UMP announcements are outsized and not in relation
to the economic fundamentals of Ems.
• Vulnerable countries are most affected and there is a wide variation in
response by countries to the developments in AMs.
• There is always a fear of abrupt reversal of inflows.

7. Trends - contd
 Cross border equity investment of Ems rose from $ 3,29 trn in 2009 to $
4.4 trn by end of 2012. International debt of EM corporates tripled to $
750 bn in the same period.
 Investor sentiments play a major role in response to developments in
AMs.
 At the end of 2012 the foreign share in total holdings of Asian and Latin
American local government bonds has risen from very low or negligible
to 10–50%. In the equity market, this share was 20– 45% in many cases.
 However, the EM official sector has invested much of its foreign assets
in major advanced economies’ currencies.
 This has been accompanied by rapid growth in the offshore foreign
exchange turnover of EM currencies.
 Share of EMs in world GDP and trade has doubled from 15% in early
1990s to 30% by 2013
 Chinese authorities have initiated a number of steps such as promoting
trade settlement in renminbi, partially liberalising capital account
transactions and developing offshore markets in renminbi products

15. Transmission Channels and Management
• Channeling of monetary policy shocks
• Signaling channel
• Portfolio balance channel
• Market functioning channels
• Liquidity channel
• Exchange rate channel
• Trade Channel
• Terms of trade channel

16. Spill over Effects
• Exchange rate
• Policy rate
• Long term interest rate
• International Bank lending
• Portfolio flows

17. Factors determining the impact on EM’s
• Macro / Fiscal Stability
• Financial Openness / Dependence
• Currency related measures
• Bank and Financial system vulnerability

18. Financial Instruments
• Mortgaged based securities
• Additional SDR’s from IMF
• Basle III – Additional requirements
• Counter cyclical Capital requirements
• Currency swap agreements ( substitute )
• Direct purchase of assets by Governments
• Direct induction of equity by Governments

19. Strategies and Policies

20. Strategies for EM’s
 Well co-ordinated fiscal management and policy / reduce fiscal deficit.
 Good Macro prudential Framework
 Good co-ordination between government and regulatory authorities.
 Synchronised Global monetary policies
 Adoption of Basle III frame work on capital, incentives and dividends
 Regulation of loans to sensitive sectors
 Financial stability framework and close monitoring of stability in the
financial services sector and asset prices.
 Close monitoring of key variables and appropriate regulatory policy
response on time as per the emerging need .
 Capital controls.
 Channelising the local savings for large projects through innovative financial
instruments.
 Encourage long term capital flows and FDI.

21. Strategies - Continued
• Accumulate forex reserves
• Trade and Financial co-operation
• Currency swap agreements
• External debt reduction
• Promote exports / reduce trade deficit
• Prudential regulation of cross border flows.
• Reduce carry trade flows
• Forex market intervention
• Counter cyclical fiscal measures.
• Management of Long term rates

22. Thank You