The International Monetary Fund cautioned emerging market countries on Thursday that their impressive growth could be at risk if advanced economies should slow, urging policymakers to ensure their economies were ready to respond.
The IMF said better policymaking over more than a decade in emerging and developing countries has made these economies stronger and better equipped to handle economic shocks, but emphasized that they were not immune to shocks from within or from abroad.
In initial chapters of its World Economic Outlook released on Thursday, the IMF warned that a surge in capital flows, rapid credit growth and high commodity prices, which have helped drive strong growth in emerging economies, were also prone to sudden stops.
"There is no guarantee that the relative calm emerging economies have enjoyed over the past two years will continue," IMF economist Abdul Abiad told a news conference. "There is a significant risk that advanced economies could experience another downturn, and in such an event, emerging economies and developing economies will end up 'recoupling' with advanced economies."
Signs that slowing global demand is cooling growth in most emerging economies are already apparent, with manufacturing output falling and business confidence waning. In July, the IMF shaved its growth forecasts for three of the four BRIC countries - Brazil, China and India. Only Russia avoided a cut in its forecast.
China's central bank has already cut interest rates twice in June and July to deal with its slowing economies, but has so far held off on more aggressive easing measures despite further signs of easing demand at home and abroad.
Focus on fiscal safety nets
The IMF report, which looks at economic expansions and downturns in more than 100 emerging and developing economies over the past 60 years, found that emerging economies were spending more time in expansion mode. Downturns and recoveries have become shallower and shorter, the fund found.
Recessions in advanced economies and sudden stops in capital flows doubled the likelihood that expansions in emerging economies will come to an end, according to the IMF report.
Shocks that emanate from within countries, such as credit booms or a banking crisis, are however more likely to lead to more significant slowdowns in emerging economies, the IMF found.
With the threat of a further slowing of the global economy, the IMF said emerging and developing countries should focus on rebuilding their fiscal safety nets so they are able to respond to a further possible downturn in advanced economies.
One reason why emerging countries have managed to weather the global crisis so well, Abiad noted, is because they were able to respond with fiscal stimulus to shore up their economies.
Many countries have yet to rebuild those fiscal buffers.
"That policy space needs to be restored by reducing fiscal deficits and keeping inflation in check," Abiad said. "These economies will be more resilient to new shocks if recent improvements in their policy frameworks - including greater exchange-rate flexibility - are maintained and rebuilt."