Resilience of emerging market economies to global financial conditions In the 1980s and 1990s EMEs experienced financial crises following a sudden reversal of capital flows. In fact, during this period there were two waves of financial crisis in the EME world. The first wave was associated with currency crises as significantly strengthened US  3  Cecchetti, S, M Mohanty and F Zampolli (2011), “Achieving growth amid fiscal imbalances: the real effects of debt”, in Achieving maximum long-run growth, a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. 4  Lo, S. and K. Rogoff (2015), Secular stagnation, debt overhang and other rationales for sluggish growth, six years on, BIS Working Papers No 482. 5  Koo, R. (2009), The Holy Grail of Macroeconomics: Lessons from Japan s Great Recession, Revised Edition, John Wiley & Sons. 6  Baker, Bloom and Davis (2013), “Measuring economic policy uncertainty”, Chicago Booth Research Paper, no 13–02, May. 2  BIS central bankers’ speeches  dollar led to massive adjustments in the fixed EME exchange rates. This followed sovereign debt crises in many emerging markets, i.e., Mexico, Brazil and Argentina. The second wave was triggered by sudden stop of capital inflows. The EM banks having intermediated these flows, as a result, caused these severe financial crises in several EMEs such as Mexico and Turkey in 1994, East Asian countries after mid-1997 and Russia in 1998.
2  OECD (2016), Economic Policy Reforms 2016: Going For Growth Interim Report, OECD Publishing, Paris. BIS central bankers’ speeches  1  The weak recovery is also very much related to the problem of demand deficiency – a situation associated with aggregate demand being less than the aggregate supply corresponding to full employment level of output in the economy. And this is probably driven by high indebtedness levels in government and private balance sheets across the world including both advanced and emerging market economies. As a matter of fact, the impaired private balance sheets caused the so-called balance sheet recession of 2008–2009 in AEs as in the USA during the great depression and in Japan during the years following the Japanese financial crisis of 1991. Now, not only the private sectors – financial, non-financial and households – of AEs but also their governments and more importantly EME private sectors suffer from high indebtedness levels. For example, some EME households have debt as large as 75 to 95 percent of GDP. Moreover, EME private balance sheets largely consist of external liabilities as opposed to domestic currency denominated assets, which expose them to increases in the cost of debtservicing foreign currency – denominated external obligations in cases of real exchange rate depreciation. Recent research suggests that agents tend to cut back their spending when their debt reaches certain levels.3,4 Going forward, we are likely to see only a gradual improvement in this stock balances problem as they take longer time to heal than flow balances problems.