Question

2. Please describe how the financial system in developing countries differs from that of most developed countries other than lack of financial liquidity and corruption. Please elaborate.

Answer 1

How the financial system in developing countries differs from that of most developed countries:

Weak economic growth outlook, particularly for emerging and developing economies (EMDE), provides an important backdrop for the financial challenges.Financial volatility returned because of various concerns in the marketplace – including shifting expectations of the shape of the Federal Reserve’s exit path from ultra-low interest rates and the rapid strengthening of the US dollar, the launch of quantitative easing by the European Central Bank and its impact on inflation expectations and bond markets; low and volatile oil prices, China’s growth slowdown, additional stimulus and financial-sector challenges, the standoff between the new Greek government and its creditors; and continuing geopolitical turmoil.

Various factors contribute to the differences that arises,which includes:

• EMDE external debt exposures have grown to record highs, making some EMDEs more vulnerable to shocks.Since 2009, large search-for-yield flows from developed markets reached EMDEs, in part driven by EMPs. As a result, portfolio investors current allocate more than $4 trillion, or 13 percent of their investments, to EMDEs. This is not driven by a singular region or country, but is a broad-based trend. Cumulative issuance in the six post-crisis years is 6.7 percent of GDP for the median EMDE, up from 4.3 percent in the six pre-crisis years.
• Prolonged extraordinary monetary policies (EMPs) in developed countries and the prospect of asynchronous exits create a wide range of global financial market challenges. EMPs in developed economies created an environment of ultra-low interest rates, as policymakers have aimed to rekindle economic growth and battle disinflationary pressures.
• The impact of the oil-price decline and increasing oil-price volatility will produce winners and losers in EMDEs with implications for financial markets and flows.
• High global debt levels pose challenges to an orderly deleveraging process and exacerbate weak growth and disinflation pressures.
• The process of global rebalancing has produced weak aggregate global demand with potentially disruptive implications for global financing patterns and growth prospects. Before 2008, distorted global savings and investment dynamics produced record-high current-account imbalances, triggering unsustainable cross-border financing patterns. Post-crisis, imbalances have fallen at the cost of demand compression in deficit countries and little offset in surplus countries. This form of adjustment contributed to falling inflation, rising unemployment, slowing global trade and rising trade tensions, and a weakening growth performance and outlook.
• Continuing geopolitical and idiosyncratic risks pose contagion challenges that could trigger spikes in global financial market volatility. Turmoil in the Middle East, along with the Russia-Ukraine crisis, are key drivers behind geopolitical volatility. That could lead to regional spillovers, as well as disruptions in the global energy markets, causing increased risk aversion in financial markets.