Since the 2008 global financial crisis, developing economies have been increasingly exposed to economic shocks. Looking ahead, the muted outlook for oil prices, higher US interest rates and a slowing global economy are likely to exacerbate these risks. Increasingly open emerging and developing economies could be supported by central banks engaging in more proactive reserve management policy and financial deepening. This is particularly important for resource-producing economies that are vulnerable to oil and commodity price swings.
This Shockwatch bulletin explores how policy-makers can help shield their economies from shocks by examining the cases of Indonesia and Nigeria, two oil-producing economies. Indonesia’s economy has benefitted from diversification away from its oil sector, along with financial deepening following successive crises, improving its resilience. Nigeria, which is facing similar challenges, could seek to emulate some of Indonesia's policies by embarking on a reform agenda that includes a credible free-float of the naira and strengthened reserve management.
The Shockwatch bulletin concludes by suggesting some reforms at the global level that could help build resilience against shocks:
- a greater role for development finance institutions;
- improved global best practices for sovereign wealth fund investment; and
- limiting disorderly volatility in the global foreign exchange market through greater analysis of high-frequency trading and its impact on emerging and developing countries’ currencies and domestic financial systems, an area which could be further expanded by the Bank for International Settlements.