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Emerging markets given opportunity to restore confidence

Thursday, 19 Sep 2013 | 5:09 AM ET
Patrick Horton | Lonely Planet Images | Getty Images

The Federal Reserve's decision to hold off on tapering its stimulus has given emerging market policymakers a golden opportunity to push ahead with reforms to improve economic fundamentals and restore investor confidence, say experts.

"This announcement will provide breathing space for many policymakers, especially in emerging countries. This is going to be a golden opportunity for them to push reforms, and show to the market that they deserve this confidence," Sri Mulyani Indrawati, managing director at the World Bank told CNBC on Thursday.

The Fed's decision to keep liquidity conditions plentiful and cheap for a longer period will provide much needed reprieve for countries running current account deficits, such as India and Indonesia. It will also lift embattled emerging market currencies as risk appetite and the search for yield re-emerge.

(Read more: No taper! DidBernanke fool the Street?)

"The fact that the money train will continue for a while means the risk of a hard-landing or a balance of payments crisis has been greatly reduced, if not averted," said Frederic Neumann, co-head of Asian economics research at HSBC.

However, with tapering likely to be postponed by three months, Neumann says the window for regaining the market's trust will not be open for long.

"To avoid another rough summer, policymakers in Asia will need to use this brief window to implement structural reforms to put Asian growth on a more sustainable path," he said.

(Read more: Let's party! Emerging markets cheer as Fed stays pat)

Taimur Baig, chief economist, Asia at Deutsche Bank said he fears that the period of respite may delay policymakers from making important fiscal and monetary adjustments, pushing difficulties out to next year.

"The other concern is the inevitable rally in asset prices will bring back the imbalances - stemming from over-consumption, [the] property price bubble, and excessive credit growth - that had just begun to correct in many parts of Asia," he said.

Taper delay is a lucky break for India
Independent economist Andy Xie and Jahangir Aziz, Chief India Economist, JP Morgan tell CNBC's Cash Flow what India needs to do to reform its economy.

"A rally in commodity prices could follow, which could push up inflation, especially in India and Indonesia," he added.

Sonal Varma, India economist at Nomura agrees policymakers in the country may be "lulled into a sense of complacency" and slow the country's reform momentum.

(Read more: No Fed taper brings back talk of currency war)

"If the currency starts to appreciate, imports will become cheaper again, and in the absence of a domestic supply response, this would result in imports starting to substitute domestic production," she said. "Therefore, we expect India's current account deficit to start to widen again."

In a pre-election year, faced with a trade-off between fiscal consolidation and growth, the government's priorities are likely to tip towards the latter, said Radhika Rao, economist at DBS.

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