The Bank of International Settlements warned that emerging markets could be vulnerable to financial crises as their strong sustained growth could fuel asset price bubbles and credit surges.
Citing the BIS's quarterly review, Reuters reported that the conditions in emerging economies are similar to what happened before the financial crises that gripped Latin America in 1982 and Asia in 1997.
The BIS in those periods, those markets enjoyed a period of strong growth, powered by low interest rates and financing from abroad. The bank noted that foreign investments are flowing into emerging markets at the highest level in over a century as they offer higher returns, with interest rates advanced economies slashed to record lows to keep their countries afloat.
The report added that the central banks in these emerging economies have used this development to build up their foreign reserves, but the BIS warned that the conditions that allowed this to happen are not sustainable.
Reuters said the BIS has taken note of the rapid credit growth in emerging markets as well as the surging real estate prices. The bank is also concerned how the combined debt of the government and the corporate sector excluding financial institutions in emerging markets are fifty percent higher than gross domestic product compared to the Asian financial crisis.
The report added that while emerging markets have increased their borrowing in local currency to shield against volatility in interest rates and currency fluctuations, foreign investors in their debt instruments may be vulnerable.
It noted that foreigners have raised their emerging domestic bond holding to 25 percent from nine percent, with losses on these instruments to have significant repercussions on some large creditors.
On the other hand, the Financial Times highlighted the BIS's projection that a slowdown may be coming to emerging markets after a period of robust growth. It said that such a development will likely cast some doubts on the strength of emerging economies.
