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Emerging markets in trouble due to Fed`s exit strategy concern

Emerging markets in trouble due to Fed`s exit strategy concern

Posted August. 26, 2013 02:58,   


Equity prices and currency values collapsed in emerging market economies after U.S. Federal Reserve Chairman Ben S. Bernanke`s May 22 remarks on quantitative easing.

According to International Finance Center and Fn Guide on Sunday, the Indonesian stock market plunged 19.9 percent Thursday during the past three months since Bernanke said on May 22 that the U.S. central bank could decrease asset purchases if economic conditions show steady improvements.

During the period, Thailand stocks dropped 17.1 percent, and the Philippines and Singapore markets plunged 16.9 percent and 10.6 percent, respectively. The Chinese market slid 10.2 percent, while Russian, Brazilian and Indian shares each posted declines of 9.1 percent, 8.9 percent and 8.7 percent.

Currency values emerging economies plummeted on concerns that the tapering of the quantitative easing would lead to massive capital outflow. The Indian rupee/dollar exchange rate surged 17.4% due to the country`s financial crisis woes. The Indonesian rupiah exchange rate rose 12.5 percent and the Brazilian real skyrocketed 20.4 percent. The Malaysian, Thailand, Philippines currencies saw their exchange rate to dollar rise 9.6 percent, 7.7 percent and 7.3 percent, respectively. Only the Chinese yuan strengthened, with its exchange rate falling 0.2 percent to the dollar.

The Korean financial markets were relatively stable. Stock markets dropped 7.3 percent, but the won/dollar exchange rate rose just 0.8 percent. Kwak Hyeon-soo, a research fellow at Shinhan Investment Corporation, said, "The fundamentals of the Korean economy are solid as the ratio of short-term foreign debt to foreign exchange reserves remains low while the current account is maintaining a surplus."

One evidence is that foreign investors are increasing purchases of Korean stocks. Ahead of the Bernanke shock, most Asian shares had surged much more than the Korean counterpart, meaning Korean stock markets have less probability to decline much going forward.

If India or Indonesia inevitably gets bailout from the International Monetary Fund, Korea will also be hit. Foreign investors could withdraw capital from the Asian market as a whole if extreme situation happens.