فشار بازار بورس و جذب ذخایر بین المللی: بازارهای نوظهور و ترس از دست دادن ذخایر در طول بحران 2008-2009

This paper evaluates how the global financial crisis emanating from the U.S. was transmitted to emerging markets. Our focus is on the extent that the crisis caused external market pressures (EMP), and whether the absorption of the shock was mainly through exchange rate depreciation or the loss of international reserves. Controlling for variety of factors associated with EMP, we find clear evidence that emerging markets with higher total foreign liabilities, including short- and long-term debt, equities, FDI and derivative products—had greater exposure and were much more vulnerable to the financial crisis. Countries with large balance sheet exposure – high external portfolio liabilities exceeding international reserves—absorbed the global shock by allowing greater exchange rate depreciation and comparatively less reserve loss. Despite the remarkable buildup of international reserves by emerging markets during the period prior to the financial crisis, countries relied primarily on exchange rate deprecation rather than reserve loss to absorb most of the exchange market pressure shock. This could reflect a deliberate choice (“fear of reserve loss”) or market actions that caused very rapid exchange rate adjustment, especially in emerging markets with open capital markets, overwhelming policy actions.

International financial markets were at the heart of the world-wide financial crisis that emerged in late 2007 and reached a climax between August 2008 and February 2009. Although the crisis started with the mortgage-related (sub-prime) crisis in the United States, and was closely linked to banks in Western Europe holding mortgage-backed securities and derivative products, it quickly led to global liquidity crisis that caused financial market turmoil through the rest of the world. We focus in this paper on the extent to which the global financial shock adversely affected the external position of emerging market economies. We measure external position by looking at changes in exchange market pressure—a combination of exchange market depreciation and loss of international reserves—as well as considering these two components separately. We are interested in two basic questions: Firstly, how was the transmission of the global shock affected by the extent of their international balance sheet exposure, financial development and financial openness?1 Secondly, given the degree of exchange market pressure, what determines the tradeoff or choice between exchange rate depreciation and loss of international reserves in absorbing the shock? We sidestep in this paper questions regarding the root causes of the crisis. These issues are covered by a growing literature dealing with the pre-crisis trends and policies that led to the buildup of financial vulnerabilities, and ultimately to the crisis in the U.S. and it rapid transition to the global economy [see Obstfeld, 2010 and Obstfeld and Rogoff, 2010, and the references therein]. Our main focus is on how the global financial crisis affected emerging market economies (EMs), where we define emerging market economies according to the Morgan Stanley Capital International (MSCI) Emerging Markets index (see Table 1, notes for the list of EMs). The focus on emerging markets stems from several observations. First, these countries were the source of most of the pre-crisis economic growth, and most of the global population lives there. Second, the process of globalization rapidly increased the financial and trade linkages of emerging markets with the OECD countries, relative to the more limited integration of developing, non-emerging market countries. Finally, the OECD countries have had elastic access to large dollar swap lines extended by the U.S. Federal Reserve (either directly or via Federal Reserve’s large swap line with the ECB). Thereby, the OECD countries were able to meet excess demand for dollar liquidity by borrowing dollar reserves from the Federal Reserve, facilitating the adjustment and deleveraging pressures. In contrast, most emerging markets were not able to rely on borrowed reserves via swap lines, and were thereby more exposed to the need to adjust abruptly to the global crisis.

We found clear evidence that emerging markets with higher ratio of the total foreign liabilities/GDP were more vulnerable to the financial crisis. Higher balance sheet exposure (higher short-term foreign debt relative to international reserves) is significantly associated with greater weight attached to currency depreciation and lower weight attached to losing international reserves as means of dealing with exchange market pressure during the crisis. While larger total external liabilities/GDP are clearly associated with larger EMP, higher ratio of external short-term debt/international reserves is associated with higher weight on price adjustment (exchange rate depreciation) and lower weight on quantity adjustment (losing reserves) as a way to accommodate a given EMP. During a major international liquidity crisis, one expects that the gross positions are more important than net positions. If most of country’s assets are non-liquid (FDI), or subject to valuation effects (equities), these assets would have limited ability to cover exposure to short and intermediate term foreign debt. Hence, the gap between international reserves and external debt may matter more than net positions during a prolonged major crisis. Our results are in line with this interpretation – for the emerging markets, small net exposure but large gross exposures with maturity and liquidity mismatches led to deeper exposure and adjustment. Despite the remarkable buildup of international reserves by emerging markets during the period prior to the financial crisis, emerging markets relied primarily on exchange rate depreciation rather than reserve loss to absorb most of the exchange market pressure shock—“fear of reserve loss”. These findings are consistent with the observations in Aizenman and Sun (2009) regarding emerging markets’ switch during the crisis from the fear of floating (Calvo and Reinhart, 2002) to the fear of losing reserves during the crisis. While international reserves/GDP ratios were high in most emerging markets before the crisis relative to their levels in previous crises, they rarely were high enough to cover the entire external portfolio liabilities of the affected countries. Thus, countries opted to rely on exchange rate adjustment, refraining from fast depletion of their international reserves. The reluctance to rely more on reserves depletion may reflect several concerns: fear that losing reserves too fast may propagate a run on the remaining reserves, and uncertainty about crisis duration may suggests keeping reserves to deal with future market pressure. Furthermore, at times of collapsing global demand, countries are more willing to engage in competitive depreciation, as the downside of higher inflation is sharply mitigated by the global recession. Interestingly, we find that emerging markets relying more on commodities in their export trade are more prone to use international reserves, and try to limit exchange rate depreciation, when faced with the global financial shock. This is consistent with the notion that commodities are priced by the global market, thus commodities exporters don’t benefit from depreciation, opting instead to use their reserves to absorb exchange market pressure. Our results are also in line with Frankel and Saravelos (2010), reporting several pre-crisis variables accounting for the 2008–2009 crisis incidence. Specifically, they found that higher pre-crisis reserves/GDP and lower pre-crisis real exchange appreciation were associated with lower exchange market pressure during the crisis. Yet, our results also suggest the importance of the ratio total external liabilities/GDP in accounting for higher exchange market pressure during the crisis. Controlling for this broad exposure measure renders balance sheet exposure insignificant. Our results corroborate the notion that globally linked national financial markets, intermediated via foreign currency markets, transmitted globally the 2008–2009 financial crisis. In turbulent times, when the duration of depth of the global crisis remains unknown, emerging markets behavior has been characterized more by the fear of losing reserves, and less by the fear of floating. Despite the remarkable buildup of international reserves by emerging markets during the period prior to the financial crisis, countries relied primarily on exchange rate depreciation rather than reserve loss to absorb most of the exchange market pressure shock. This could reflect a deliberate choice, possibly to gain competitiveness at times of collapsing export demand. It may also reflect market actions that moved quickly and strongly to adjust to changing circumstances, especially in emerging markets with open capital markets. The financial market crisis was followed by a global recession, suggesting that exchange rate depreciations attempting to improve international competitiveness can be part of the adjustment of small economies but can’t resolve global collapsing demands. Our findings also confirm the key importance of balance sheet effects in explaining vulnerabilities and adjustments. Countries with higher total foreign liabilities/GDP were more vulnerable to the financial crisis. Countries with larger balance sheet exposure — higher external portfolio liabilities exceeding international reserves — responded to the global shock by allowing greater exchange rate depreciation and comparatively less reserve loss.