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New Delhi, June 30 Even as growth prospects for emerging market economies (EMEs) including India and China remain robust, the worsening outlook in advanced countries’ economies could pose ‘major challenges’ to policy, the Bank for International Settlements (BIS) said today.

In its 78th annual report presented at its annual general meeting in Basel (Switzerland) on Monday, the BIS, known as the central bankers’ bank, said that there were risks that emerging market exports could weaken which in turn constrain their ability to boost domestic demand. Those countries with high current account deficits and short-term debt or depending heavily on cross-border bank financing might also be vulnerable to capital flow reversals, it said, adding that a pronounced slowdown in the US would hurt the emerging market economies as they still depend significantly on external demand.

Stating that the US continues to be important for emerging market economies, BIS said that it is the destination for 20 per cent of China’s exports and a slowdown in the US would not only moderate direct demand for Chinese goods, but could also have a knock-on effect on the other emerging economies that export intermediary goods and commodities to China.

“US demand could fall in those particular sectors in which EME exports are heavily concentrated, as occurred with Asian information technology exports during the US slowdown,” the BIS report cautioned.

Further, EME exports are also being bolstered by the greater resilience of European Union imports and growth so far compared to 2001.

But, it said, “Any substantial deterioration in the growth outlook could adversely affect emerging markets.”

Moreover, BIS said, in sharp contrast to the US slowdown in 2001 when the dollar was appreciating, the current depreciation in the US dollar against emerging market currencies — which ‘could well continue’— could exacerbate the contractionary impact of the US slowdown on exports from these countries.

Recent increases in headline inflation have caused inflation targets to be breached in many EMEs, reflecting the impact of steep increases in oil and food prices. It said efforts to resist currency appreciation have introduced additional complications, having been associated with a sharp spurt in foreign reserves and in credit growth in a number of EMEs.

Credit to private sector grew at an annual rate of 29 per cent in Latin America, 25 per cent in India and 17 per cent in China, it noted.

An added risk for emerging economies is that the possibility of increasing consumption or investment spending to counteract a weakening in global economic growth could be hampered by lower demand for exports.

With still high public debt ratios in many of these countries, tighter financing conditions could also constrain spending and the rising price of subsidised energy could limit fiscal policy if there is a sharp slowdown, it noted.

Taking a broader picture, it said while global output grew at a healthy pace 4.5 per cent in 2007, output growth in the G-3 economies decelerated from close to 3 per cent in 2006 to less than 2.5 per cent last year.

The slowdown also spread to several other advanced economies. As a result their import volume slowed to a rate of just above 3 per cent from a level of 6 to 0 per cent since 2004.

However, the impact of this on emerging market economies has so far been limited.

“Strong domestics demand in Brazil, China and India raised aggregate output growth in emerging market economies to over 7.5 per cent in 2007,” it said.

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