Concerns about a tapering of the US Fed’s asset purchases under QE3 have caused a sell-off in EM financial markets, but we think the economic impact on EMs from the end of ultra-loose monetary conditions in the developed world is likely to be relatively limited. Most EMs are no more dependent on external financing now than they were in 2008. As such, the majority should be able to withstand a reversal of capital inflows associated with a tightening of global monetary conditions. Of course, there are a few exceptions, namely those with particularly large external financing requirements. (See Chart.) Nonetheless, we think EM growth is likely to remain disappointing for other reasons, not least the structural slowdowns in the BRIC economies, which make up around a half of total EM GDP.
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