A big wild card for emerging-market central banks in the months ahead will be U.S. monetary policy. Many emerging markets have been buffeted in recent weeks by the U.S. Federal Reserve‘s discussions of exiting from its easy-money policies. The Fed’s $85 billion-a-month in bond purchases, launched in September, lowered U.S. long-term interest rates, triggering a surge of capital into fast-growing emerging markets with higher rates. The Fed sparked a reversal in those flows in June when the bank said it could begin reducing its bond buying later this year and end the program altogether by mid-2014 if the U.S. economy improves as Fed officials expect. The news caused investors to restructure their portfolios, stoking volatility in currency, bond and equity markets around the globe.
Sri
Lanka is largely prepared for the Fed’s exit because it has tried to limit its
exposure to swift changes in capital flows. The Sri Lankan authorities have
been careful not to open up their debt markets too wide, too fast, he said,
focusing on international investors looking for long-term exposure. U.S.
investors have tended to buy long-term Sri Lankan debt. CEB’s credit story has been convincing,
Investor demand, strong growth, a declining deficit and the end of conflict has
pushed borrowing costs down several percentage points. The central bank governors in the region have
been swapping strategies at recent meetings. The biggest fear in the global
economy is the euro-zone crisis, where authorities haven’t been able to tame
prolonged recession that threatens to deteriorate into something worse. Europe
is one of Sri Lanka’s largest export markets. If a harbinger for other emerging
markets, Colombo’s response should be a cautionary tale for Europe. Many firms
are now looking for alternative export markets: the currency union’s ongoing
problems are spurring Sri Lankan officials to start negotiating a free-trade
agreement with China. The bank also wants to expand its reserve holdings of
Chinese yuan.
