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Clouded outlook for emerging markets

October 2018

The IMF expressed concern over the outlook for emerging markets during October: as monetary policy continues to normalise in advanced economies, capital inflows to emerging economies could start to decline. The IMF believes that the most vulnerable countries are likely to be those with large external imbalances and weak policy frameworks, but capital outflows could intensify if global risk aversion increases. 

  • Growth slowed in China
  • The RBI held interest rates at 6.5%
  • Jair Bolsonaro won Brazil’s presidential election

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The International Monetary Fund (IMF) expressed concern over the outlook for emerging markets during October: as monetary policy continues to normalise in advanced economies, capital inflows to emerging economies could start to decline. The IMF believes that the most vulnerable countries are likely to be those with large external imbalances and weak policy frameworks, but capital outflows could intensify if global risk aversion increases. Meanwhile, in an interview in the Sunday Times, Chief Executive of the Financial Conduct Authority (FCA) Andrew Bailey also warned that the normalisation of monetary policy – particularly in the US – poses a substantial threat to some emerging markets, particularly those with “debt-sustainability issues”.

“Capital outflows could intensify if global risk aversion increases”

Share prices fell heavily in China during the month amid signs that the country’s economic growth is slowing down, hampered by the trade war with the US. China’s economy grew by 6.5% during the third quarter of 2018, compared with its second-quarter growth of 6.7% and first-quarter growth of 6.8%. The People’s Bank of China (PBC) announced a cut to its reserve requirement ratio – the amount of cash that banks have to hold in reserve – by one percentage point, freeing up 1.2 trillion yuan of liquidity. However, this was not sufficient to offset concerns over the possible economic impact of the ongoing trade dispute. The Shanghai Composite Index fell by 7.7% over October. 

Having raised interest rates in June and August, policymakers at the Reserve Bank of India (RBI) maintained rates at 6.5% at their October meeting. Their decision disappointed those who had expected an increase amid gathering inflationary pressures, although officials did decide to change their stance from “neutral” to “calibrated tightening”. The RBI has a consumer price inflation target of 4% and expects inflation to reach 4.8% in the middle of next year. The annualised rate of consumer price inflation rose from 3.69% in August to reach 3.77% in September, underpinned by rising prices for food and fuel. Looking ahead, policymakers highlighted tightening global financial conditions, rising energy prices and global trade disputes as key risks to India’s economic outlook. During October, the CNX Nifty Index fell by 5%.

Brazilian equity prices were volatile during October, but ended the month sharply higher as investors responded to the news that controversial far-right candidate Jair Bolsonaro had won Brazil’s presidential election. The Bovespa Index rose by 10.2% over October as a whole.


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