The insufficient volume of external safety nets as well as the underdeveloped nature of financial markets in EMEs made financial crises unavoidable. In addition, inability to implement countercyclical policies made EMEs suffer from larger damaging effects of financial crises on their real economies than otherwise. It is noteworthy that despite the lack of capacities in avoiding financial crises, EMEs mostly managed to recover swiftly from their acute past financial crises succeeding severe economic recessions. Likewise, most EMEs survived the – a once in a century event – GFC of 2008 in spite of its profound impacts on the financial systems of AEs with the subsequent “balance sheet recessions”. EMEs again largely escaped the great recession though some of them had brief economic recessions. With lessons learned from previous episodes and improvements over the years EMEs are, on average, better positioned to withstand financial turbulences, both now and in the near future, than in the past. First of all, they embarked on extensive structural reforms aimed at overhauling financial regulatory and supervisory systems, strengthening public finances and fiscal discipline, granting central banks independence, and adopting flexible exchange rate systems. These reforms enabled them to implement more prudent and countercyclical policies as well. EMEs solidified their post crisis reforms by accumulating adequate foreign exchange reserves as an alternative to the IMF provided financing, which carries strong conditionality, as well as further deepening and broadening their domestic financial markets.
The Fed’s normalization of interest rate demonstrated that its impact on the global economy and financial markets indeed has been large, giving rise to significant capital outflows from EMEs, large adjustments and volatility in exchange rates as well as widened EM spreads and interest rates. The adverse effects of the Fed’s interest rate normalization has been on average larger than those occurred in previous two financial turmoil episodes namely the Eurozone sovereign debt crisis and the US tapering tantrum. Moreover, the disparity between the effected countries has been large too. The plummeted commodity prices as well as other factors led to this outcome as commodity importers suffered from both the lower commodity revenues and the tightening global financial conditions. Financial markets also differentiated EMEs by policy frameworks and prudent policies. Those having rich and better policy frameworks and prudent policies have withstood the recent global financial turmoil better than others. Commodity-exporting and commodity-importing EMEs have different monetary policy options. While commodity exporters have limited monetary policy space, commodity importers have some rooms to counteract. In the former group, inflations increased and balance sheets weakened due to the currency depreciation. In the latter group, in some countries, inflations decreased and central banks cut policy rates thanks to the low oil prices. However, in several oil importing countries, inflation is near or above the target bands. For central banks in these countries, tightening the monetary policy may be a priority for the credibility of central bank.