Monetary policy did not get traction quickly, in part because the authorities were worried that producing higher real interest rates to stem the decline in the exchange rate and offer a higher return to attract flows back into the country would exacerbate the confidence problem, by causing a deeper contraction in growth. BIS Review 91/2006  1  In some cases, a history of high inflation, fiscal profligacy or default magnified the difficulty of restoring confidence. In almost every case, this dynamic was exacerbated by political conditions, a looming election or leadership succession that raised uncertainty about the competence and credibility of future economic policy. Things look dramatically different today. If you compare an aggregate or typical emerging market balance sheet today with the equivalent from a decade ago, the improvement is striking in a number of dimensions. Current account balances have gone from substantially negative to positive. External debt has fallen as a share of GDP. Reserves have grown to remarkable heights and are now a substantial multiple of short-term external debt, annual external debt service, or other traditional metrics of the scale of potential claims on reserves. Public debt burdens are higher, but the composition of debt is less risky, with longer maturities, a greater share denominated in the currency of the sovereign, and more fixed rather than floating interest debt.
But, some of this progress was undoubtedly facilitated by the relatively favorable economic and financial conditions of the global economy and only time will tell whether it will prove robust in circumstances of greater macro adversity. Of course, these broad trends in balance conditions mask substantial differences across countries. There is wide dispersion around the typical or average balance sheet I have described, and some important areas of vulnerability remain. Many countries still face daunting fiscal problems and are only beginning to be able to issue debt in their own currency at longer maturities. The political consensus that provided support for these improvements looks vulnerable to challenge in many countries. For a  2  BIS Review 91/2006  number of countries, improving financial strength will have to remain at the top of the hierarchy of policy priorities. And even where progress has been most impressive it could be eroded quickly. Where progress has been made in reducing important sources of financial instability, policymakers in emerging markets have the opportunity to focus more effort on reforms that can help achieve and sustain higher growth in the future and on developing an institutional infrastructure strong enough to serve as the foundation for further integration into the global economy. This shift in focus brings with it of course a daunting array of complex economic policy challenges.