WASHINGTON Feb 11 The U.S. Federal Reserve on
Tuesday acknowledged it likely triggered a financial market
sell-off in the developing world, but said policies in countries
such as Turkey, Brazil and India made them especially vulnerable
to external shocks.
The Fed said in a report to Congress that the "stresses that
arose in the middle of last year appeared to be triggered to a
significant degree by Federal Reserve communications."
In mid-2013, the U.S. central bank said it could soon start
winding down a bond-buying stimulus program, sending stocks,
bonds and currencies plunging across many emerging markets. The
announcement stoked global tensions over potentially
destabilizing shifts in international money flow, as when
India's central bank chief fretted that the United States should
be more aware of how its policies affect the world.
In its report, however, the Fed pointed a finger back at
some developing countries, saying they need to look in the
mirror when assessing why their markets took a big hit.
Fed analysts built an index measuring economic vulnerability
across 15 major emerging markets. They found Turkey was the most
vulnerable, followed by Brazil and then India.
Indonesia and South Africa followed in the ranks of the most
vulnerable. The index was based on six factors, including
current account balances and foreign currency reserves relative
to economic output.
The Fed analysis found that the most vulnerable countries
tended to experience the biggest currency depreciations as well
as larger increases in interest rates for government borrowing.
"This evidence is consistent with the view that reducing the
extent of economic vulnerabilities is important if (emerging
market economies) are to become more resilient to shocks," the
The analysis highlighted how some developing economies have
made strides to reduce their vulnerabilities. China, for
example, was listed as one of the least vulnerable countries.
China has amassed a massive war chest of foreign currency
reserves over the last decade and has a relatively low level of
The Fed said some developing counties have countered the
market volatility by hiking interest rates, intervening in
currency markets and other "stopgap measures."
It said global investors would be carefully watching which
countries take steps to reduce "fundamental vulnerabilities."
"Continued progress implementing monetary, fiscal and
structural reforms will be needed," the Fed said.