Need for Fundamental Adjustments

“It is not yet clear that we have had sufficient FX adjustment across all EMs, with further weakness possible in ZAR, TRY, and BRL – evidence of stronger exports and softer domestic activity can lead to market stabilization, as in case of India recently – credible policy responses can also help markets stabilize. (i) For many EMs, moving to a sustainable pace of growth and reducing external imbalances requires a combination of weaker currencies and higher rates. (ii) In most places, real rates are only just normalizing from extremely low levels. (iii) Given the FX depreciation and policy tightening so far, it is vital to keep a close watch on the data. (iv) A credible response will need to convey the signal that authorities are also ready to face the consequences of policy tightening on activity.” (Goldman Sachs)

Current Account Balances

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