The strong U.S. dollar, along with other factors, has emerging markets facing yet another “dollar recession” in 2016, says Fitch Ratings in a new report.
There are three major reasons for so-called “dollar recessions” in emerging markets, the Fitch report says, including lower commodity prices, U.S. dollar strength and gross domestic product (GDP) contractions in local currency terms. Of these,the strength of the U.S. dollar is “the single most important issue” facing emerging market (EM) economies, the report says.
“Unfortunately for [emerging market] policymakers, two of the three — commodity prices and the dollar — are largely beyond their reach,” the report says, adding, “… several central banks have made failing attempts to resist the strengthening of the dollar, running down foreign exchange reserves before giving way to overwhelming exchange rate pressures.”
Fitch estimates that GDP in dollar terms contracted by 6.6% in 2015 for the 30 biggest emerging markets, and its latest forecasts indicate that “dollar income will fall again in 2016.”
The combined two-year decline will be slightly larger than the recessionary period of 1998-1999, the report says, adding that the current decline is also broader, with dollar GDP falling in 23 of the 30 largest EMs last year, compared to 16 in 1998.
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