Emerging economies more dependent on foreign capital: BIS study

Emerging economies more dependent on foreign capital: BIS study

BASEL

Tuesday, December 9, 2008

EMERGING economies are increasingly dependent on foreign capital, making them more vulnerable to the current financial crisis, a study by the Bank of International Settlements found.

In the study published on Sunday, the world's top central bank body said: "Many emerging economies have increased their dependance on credit accorded by international banks."

However, with the ongoing financial crisis, these banks could reexamine their exposure to the emerging economies and cut back on lending, resulting in a "negative impact on the real economy" of these emerging countries.

In recent years, lenders particularly in eastern European countries such as Hungary and Poland have offered loans in Swiss francs or euros at lower interest rates than those of central European currencies.

While the low interest rates are attractive, borrowers were essentially betting on a constant exchange rate with a weak franc or euro.

But they were in for a rude shock when the franc or euro gained significantly in recent weeks against local currencies.

Hungary, which was severely hit by the financial crisis due to its heavy dependence on foreign capital, was forced to tap on aid from the International Monetary Fund and the European Union.

According to BIS statistics, international lending to emerging economies quadrupled after 2002, reaching US$4.9 trillion in mid-2008. International credit to Hungary increased seven-fold in the first half of this year, reaching almost 80 per cent of total credit accorded to the non-banking sector.AFP