DO NOT BLAME THE FEDERAL RESERVE

Don’t blame the Federal Reserve for the recent selloff in some emerging markets.

That’s the verdict from a new report from the World Bank that examines the outlook for capital flows into developing economies in 2014.

The World Bank’s semi-annual Financial Markets Outlook argues:

Although the turmoil coincided with the further unwinding of the Federal Reserve’s quantitative easing program, it does not appear to have been caused by it.

The actual decision to continue tapering asset purchases was made on January 29, after the sell-off began and in line with market expectations.

Unlike the sharp selloff in emerging bonds and currencies last May, when the Fed first signalled it would slow its bond-buying programme, yields on ten-year US Treasuries actually fell during this year’s bout of volatility, the report said.

The report’s conclusion comes as G20 finance ministers prepare to gather in Sydney, where the question of the fallout for emerging markets from the Fed’s decision to slow stimulus is expected to be on the agenda.

With the gap in rate growth rates between developed and developed economies expected to narrow this year, the World Bank expects private capital inflows into emerging economies to slow this year.

It forecasts net private capital inflows will slow to $1.065 trillion (4.2 percent of developing country GDP) in 2014 from $1.078 trillion (4.6 percent of GDP) in 2013.

According to the World Bank, those developing economies with a larger reliance on foreign capital – such as India, Turkey and South Africa – were hit harder by the selloff.

Given the selloff that marked the last two weeks of January has abated, the report argues that:

A return to calmer market conditions after the January 2014 unrest offers an opportunity for policy-makers across developing countries to address vulnerabilities and undertake the necessary confidence-building reforms. Policy complacency would eventually lead to larger adjustments down the road, and come at greater economic cost given the closer scrutiny of domestic risks by financial markets.