The Fed submitted a controversial financial policy report to the United States Congress on Feb. 11 (local time). In the report, Korea and Taiwan were mentioned as model cases of economies countering the current financial recession. The report also criticized some emerging countries such as India and Brazil as having brought it upon themselves. “Brazil, India and Turkey have employed just stop-gap measures like interest rate hikes and intervention in the foreign exchange market to block capital outflow,” it read.
This is the first time since May last year, when the recession began, that the Fed published a report to criticize certain emerging countries in an outspoken manner. It seems that the Fed opted to launch a preemptive strike before the G20 Finance Ministers’ and Central Bank Governors’ meetings scheduled between Feb. 22 and 23 in Sydney, Australia. It is expected that emerging countries will blame the Fed for having caused some instability by unilaterally announcing the tapering of quantitative easing.
The Wall Street Journal predicted that the latest report of the Fed will fuel controversy surrounding the tapering at the G20 meeting. “Chair of the Board of Governors of the Federal Reserve System Janet L. Yellen and Treasury Secretary Jacob J. Lew will show a more aggressive stance than before against the emerging economies, as well,” it said.
According to the Fed’s report, the financial markets of emerging economies suffered from repercussions such as foreign currency outflow and government bond price drops after the Fed gave a hint on the tapering in mid-2013. But things were quite calm in December, when the asset purchase reduction was actually implemented. “The economic fluctuations of January 2014 should be attributed to concerns over the manufacturing sector of China, depreciation of the Argentine peso, and Turkey’s move to defend its currency value rather than the tapering,” it continued.
Recently, Indian central bank governor Raghuram Rajan and many other figures in emerging countries have asserted that the fiscal policy of some advanced economies threw them into turmoil, and international cooperation in the financial sector should be restored. Still, the report said in response that the foreign capital exodus from those economies as of late is because of their weak economic fundamentals. The Fed even came up with a vulnerability index newly drawn up against 15 emerging countries, including Indonesia and South Africa.
The vulnerability index runs along the x axis. The y axis is the currency fluctuation rate. South Korea has both positive currency fluctuation and low vulnerability.
Korea and Taiwan recorded approximately 4.0 in the index, and China, Malaysia, and Mexico followed them with 5.0 to 10.0 points, respectively. Meanwhile Turkey, Brazil, India, and Indonesia posted over 10.0, to be the most vulnerable countries from the Fed’s viewpoint. Korea and China were the only emerging economies that showed currency value appreciation between late April last year and February 6, 2014.
The vulnerability index was prepared by calculating the ratios of the current account and national debt to the national GDP, the amount of foreign reserves and credit loans to the private sector for the past five years, and the three-year average inflation rate. The higher the points, the higher the economic vulnerability.