The Hindu Business Line : ‘Emerging economies have to be vigilant’

Mumbai, Nov. 2 In a globalised world, emerging market economies may be more vulnerable to shocks originating in developed economies and this would therefore call for extreme vigilance on the part of policy makers, said Mr T. T. Mboweni, Governor of the South African Reserve Bank.

Talking about the recent turmoil following the US sub-prime issue, Mr Mboweni said it was a liquidity and credit crisis emanating from financial institutions having exposure to the sub-prime marketMr Mboweni was speaking on the “Monetary Policy Challenges in turbulent times” at the 13th Chintaman Deshmukh Memorial Lecture organised by the Reserve Bank of India. About the global financial market integration, Mr Mboweni said, “Although the sub-prime crisis was an issue related to the US, the adverse developments were transmitted to other developed and emerging markets without much relation to domestic developments.”

Even the foreign exchange markets witnessed a significant increase in volatility as carry trades were rapidly unwound and emerging market spreads rose significantly between late July and mid-August.

Household debt levels have been on the rise alongside the financial deepening, both in developing and advanced countries, he felt. “Rapid increase in household indebtedness have been associated with increases in asset prices, mainly house prices and these have increased the probability of defaults, stemming from adverse external shocks and rising interest rates,” he added.

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