The financial crisis severely impacting the US and Europe, has even reached the shores of emerging market economies and their growth is likely to slowdown by the end of the year, Moody's says.
As per Moody's Economy.com, a subsidiary of Moody's Corporation, emerging economies have tipped into financial crisis-mode and many of the drivers that led these countries to prosperity this decade including rising commodity prices, robust capital inflows, strong economic growth, appreciating currencies, and low inflation, are now operating in reverse.
"We have counted on emerging economies, which collectively account for half of global GDP, to hold up.
"However, with the credit crisis reaching shores of emerging market countries, their growth is now likely to fall well below trend by the end of the year," the report stated.
As the risk of a global recession builds, financial capital is flowing out of emerging economies, the resulting drop in asset prices and tightening of financial conditions have further slowed domestic demand.
The report revealed that emerging market policymakers are rapidly changing their focus to downside growth risks, despite the inflation risk posed by currency depreciation.
Central banks in Taiwan and China have lowered interest rates twice in less than a month, while officials in India and Brazil have been tinkering with banks' required reserve ratios in an effort to ease financial strains, Moody's Economy.com said.
The Reserve Bank of India on Friday announced a further one per cent cut in mandatory cash requirements for banks to keep with the central bank, in addition to the 50 basis points reduction declared earlier, which would come into effect from tomorrow.
The report further stated that falling currency rates can cushion demand by making country's tradable goods more competitive, and this is not unfavourable, since growth in emerging economies is under pressure from tighter domestic financial conditions and fewer exports to developed countries.
However, currency depreciation also has negative consequences, especially in times of financial stress, while the inflationary implications can stonewall effective monetary policy as central banks fear cutting rates, the report added.
Meanwhile, many emerging countries have large foreign exchange reserves that can be used to limit damage to their currencies.
Some central banks have stopped buying dollars and selling their own currencies (limiting their appreciation), while others, including South Korea, whose currency is down 32 per cent year to date, have begun selling dollars in an effort to bolster their currency values.