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IMF warns protectionism and monetary tightening to hurt emerging markets

An Indonesian man reads a newspaper featuring an article about US President-elect Donald Trump at a stall on November 10, 2016 in Medan, Indonesia.
Jefta Images | Barcroft Images | Barcroft Media | Getty Images
An Indonesian man reads a newspaper featuring an article about US President-elect Donald Trump at a stall on November 10, 2016 in Medan, Indonesia.

Emerging economies are set to slow this year as the U.S. Federal Reserve begins raising interest rates and there's a rising protectionist rhetoric in advanced economies , the International Monetary Fund warned on Monday.

While emerging and developing markets have benefited from rising commodity prices and capital inflows in the post-2000 period, the recovery from the North Atlantic financial crisis and China's attempts to re-balance its economy have reduced growth among commodity exporters. Now, rising protectionist rhetoric and the expected tightening of financial conditions pose new threats to emerging markets, the IMF noted in its World Economic Outlook report.

"Growth across emerging market and developing economies in recent years once again displays heterogeneity – a mix of tapering, standstills, reversals and continued strength in some cases. This change has taken place against a backdrop of fading external tailwinds, including waning potential growth in advanced economies, slowdown and rebalancing in China, and a shift in the commodity cycle that has affected commodity exporters," the Fund said in the report.

"Together with a risk of protectionism in advanced economies and tighter financial conditions as U.S. monetary policy normalizes, these changes make for a more challenging environment for emerging market and developing economies going forward," the report also said.

The IMF believes that emerging and developing markets, which now account for more than 75 percent of global growth in output and consumption, are facing the most complicated external environment than they have grown accustomed to in recent decades. However, the Fund pointed out that emerging economies have room to offset the impact of external conditions.

"Faced with a potentially less supportive external environment than in the past, emerging market and developing economies can get the most out of a weaker growth impulse from external conditions by strengthening their institutional frameworks and adopting a policy mix that protects trade integration; permits exchange rate flexibility; and ensures that vulnerabilities stemming from high current account deficits and external debt, as well as high public debt, are contained," the Fund advised in its report.

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