«ACR»: emerging markets suffer from conflicting monetary policies

2812 2015

Asia Capital Investment Company said in its analysis weekly for emerging markets in Asia that after seven years of the application of very loose monetary policy, the United States to raise interest rates this month, this was a breakthrough period began in mid-2007 when an interest rate cut from 5.25% to reach to 4.75% in the context of financial instability and tighter credit conditions until it reached 0.25%.

She «ACR» Since then, economic conditions have improved markedly, the real GDP continued growth taken at a rate of more than 2% per year in the public and a half years, while the unemployment rate dropped from 10% in 2010 to 5% this year and settled the annual wage growth at 4% higher than during the last two years.

However, the US economy still faces significant threats on the external front, global demand is still fragile in front of the increasing strength of the dollar.

She drew «ACR» to indicate that these threats coupled with low inflation and warnings of the Federal Reserve that interest rate increase will be gradual and that policy will remain relatively flexible at the present time.

The company in its analysis showed that changes in interest rates in the United States occupies emerging markets.

In Asia, the majority of currencies fall under the flotation system and therefore does not comply with the US dollar.

It is likely that these currencies are under pressure until it is reduced when the Fed raises interest rates.

Where dollar-denominated assets more attractive for analogues in Asia due to the provision of higher returns, leading to the flow of funds abroad and the lack of value of the currency.

The «ACR» that Asian central banks should seek to counter the effects of US monetary policy by raising interest rates can, but this will slow down the growth and raises forecasts contraction of the economy in a region already suffering from the slowdown and deflation.

It states that he may have caused the increase of interest rate in the mid-nineties during the reign of Alan Greenspan at the exit of funds from Asia at a great rate but is the macro-economic conditions in the region is much better where there is in the current account surplus increased by 4% compared to the lack of 2% of GDP It fell short-term external debt by half, from about 30% of GDP.

As well as the currency is no longer pegged to the dollar and increased reserves more than doubled to more than 140% of GDP.

Overall, the impact of the gradual tightening of the United States on Asian monetary policy will not be great as it was in 1997.

Analysis «ACR» He added that part of the currency in the Gulf states is fundamentally different from what it is in most Asian countries.

Since the Gulf currencies linked to the US dollar with a nominal reference to a basket of currencies, as is the case in Kuwait. Peg means the loss of the independence of the policy so as to follow the reference currency rate policy or carry the risk of capital flow abroad.

In fact, the Gulf states have adapted to the new situation.

For example, it raised the Saudi Arabian Monetary Agency (SAMA), the reverse repo rate by 25 basis points to 0.5% as well as responded to Kuwait, the UAE, Bahrain, the decision of the Federal Reserve Board.

At the same time, the Gulf states are exposed significantly to the deteriorating market power, which accounts for half of the economy and 85% of overall revenues.

Lower oil prices and the tightening of the terms of access to credit is a serious problem for the Gulf States.

Besides the risk of slowing growth, the currency system could face considerable pressure in the event of the current situation remained as it is and the Gulf states continued to spend its reserves of hard currency.

Analysis «ACR» believes that emerging markets are divided between two electrodes Mottagazban.

The first element is to stress the progressive US monetary policy, which will increase the pressure on the dollar-pegged countries to raise interest rates.

The other element is the deep relaxation in the existing European and Japanese central banks' policies, which limit the ability of emerging markets to competition.

Currently, monetary policies in the main countries in conflict.

Despite lower oil prices, Gulf states will remain tied to the United States and will raise interest rates.

In Asia, taking into account the current economic moves, Asian central banks will follow closely the monetary policy in Europe and Japan to the maximum extent possible.

© Al Anba 2015