The International Monetary Fund (IMF) has warned that emerging markets should prepare for capital outflows because countries like Brazil and Russia fail to boost domestic consumption appropriately.
The current recession in these countries cannot be addressed by increasing exports to the US and other advanced countries. If the advanced markets fail to absorb the supply from the emerging countries, a serious investment re-adjustment would happen in emerging markets.
If the US and other advanced nations taper their money-easing policy, the impact would hit emerging markets harshly. In the course of investment exits from emerging markets, multiple simultaneous capital outflows would cause a liquidity crunch.
In particular, foreign currency outflows from a small economy like South Korea would put it under pressure for currency depreciation. Sharp currency depreciation would prompt foreign investors to flee the market, leading to a foreign currency crisis.
In theory, an emerging country can intervene in the foreign currency market or cut its benchmark rate against quantitative easing from an advanced nation.
However, any direct market intervention can cause foreign capital flight and a rate cut can pressure consumer prices.
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