Quantitative Tightening and Next Eleven economies

Major concerns were raised with respect to the prospect of the exit strategy from Quantitative Easing. However, most of these concerns were related to US and the other developed economies which implemented this monetary policy. Less attention has been given the impact on emerging economies.

Once the prospect of a gradual exit from monetary policy appeared, following the speech by Bernanke in May 2013, emerging markets were hit by capital outflows and exchange rate depreciation. The basic reasoning for this is that investors became less willing to hold risky assets. But, were all emerging affected in the same manner?

Fernanda Nechio discusses this issue in a small article here. She finds that countries most severely affected by capital outflows and exchange rate depreciation were those with weak fundamentals, like high current account deficits or high fiscal balances.

What is even more interesting is how the group of countries labeled as Next Eleven behaved. This group consists in those emerging economies with a high potential of growth that could enable them to reach and surpass the BRICs economies.




The figures above (from Fernanda Nechio’s paper) contain a consistent number of Next 11 economies. We can focus on the largest economies in this group, i.e. Indonesia, Mexico, South Korea and Turkey. Except South Korea, all other large N11 economies passed through consistent and even severe (for Indonesia) depreciations. While these countries might have good prospects of growth, they should also have very sound and solid economies, able to cope with large unexpected shocks.

It seems that the way towards becoming significant actors in the world economies is not easy. This can also be seen from the history of crisis in economies like Mexico, South Korea and Turkey.


Read more:

Quantitative Easing Risks

Quantitative Easing: the Exit Strategy

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