Will Emerging Markets Remain Resilient to Global Stress?

Abstract

Emerging markets have shown considerable resilience to the credit turmoil that engulfed mature markets. However, sentiment remains fragile and financial strains from the global credit crisis continue to weigh on global economic prospects. External finance has become both more costly and restricted as credit risks have repriced, global banks’ lending capacity has shrunk, and, as a consequence, global investors have reduced leverage. Global growth is moderating, led by a slowdown in the United States. At the same time, global inflation risks have intensified amid sharply rising commodity prices, including record oil prices. Risks that higher inflation could become more entrenched have risen appreciably. Against this backdrop, emerging markets are subject to increased global stress. Economies with current account deficits financed by private debt or portfolio flows, where domestic credit and inflation have grown rapidly, are most at risk. Rising inflation increases macroeconomic risks and may induce financial instability in local financial markets in some emerging economies, especially where central bank inflation fighting credentials are less well established.

Contours of Deepening Financial Globalization in the Emerging Market Economies

“…As the global banks lending capacity shrank and global investors reduced leverage, capital infl ows to the EMEs dwindled (Dattels and Miyajima 2009). Equity investment from the global investing community, particularly large institutional investors began to be swiftly withdrawn from the EMEs in the third quarter of 2008.…”

DeepVaR: a framework for portfolio risk assessment leveraging probabilistic deep neural networks

“…The financial institutions started using VaR as a risk estimation metric to ensure their survival during catastrophic events, after the stock market crash on Wall Street in October 1987. The fact that the 2008 financial crisis resulted in an overall loss of $3.4 trillion among all major financial institutions over the world according to the International Monetary Fund (IMF) (Dattels and Miyajima 2009 ) is an example of the need of an efficient (innovative) VaR prediction methodology. Thus, it is crucial now that the COVID-19 pandemic has affected the global economy to a great extent (Das et al 2021 ) to revise the risk-assessment tools and address their methodological limitations.…”