By William Schomberg
PARIS, Jan 12 (Reuters) - Emerging economies may need to resort to radical interventions in financial markets, similar to the sweeping measures taken by rich countries during the financial crisis, to cope with sharp capital outflows, the head of Mexico’s central bank said.
Bank of Mexico Governor Agustin Carstens told a conference of central bankers in Paris on Tuesday that developing nations ultimately needed to undertake tough reforms to increase their long-term economic growth rates.
But there might not be enough time for that to happen, given the scale of outflows of capital from emerging economies, as some of the world’s advanced economies start to move away from the era of rock-bottom interest rates, he said.
Last month, the U.S. Federal Reserve raised its benchmark rate for the first time since before the financial crisis.
In extreme cases, central banks in emerging markets might need to intervene in domestic bond and securities markets, Carstens said, a day after Mexico’s peso currency fell to a new record low against the U.S. dollar.
”We might have to be market makers of last resort, in our own local markets, not very different from what advanced economies did at the time of the crisis. It might be the time for emerging market economies to become unconventional.
“I would like to avoid this, but given the fact that the stock adjustment might be so violent, given the sheer size of the (flows), there might be no other alternative,” he said.
Emerging markets saw net capital outflows last year for the first time since 1988, according to the Institute of International Finance.
It has also noted record capital outflows from China and forecast more hardship ahead for developing economies as investment inflows shrink and the cost of borrowing rises.
Carstens called on financial regulators in affluent countries to take steps to check how major asset managers, whose investment decisions often cause sharp moves in emerging markets, are managing their liquidity, including via stress tests, and consider applying some liquidity requirements.
He also said emerging market central banks could do more to coordinate responses to volatility in markets. An international safety net, as proposed by the International Monetary Fund, is “relatively urgent” for some countries, he added. (Reporting by William Schomberg; Writing by Ana Nicolaci da Costa; Editing by Mark Heinrich)