A Shock-Smoothing Facility (SSF) for the IMF

A. Introduction Over the last few years, emerging markets and developing economies have enjoyed a remarkably benign global environment. Their economies have been supported by low interest rates in the United States, low risk premiums, strong growth in major export markets, and high prices for commodity exports. This supportive global environment, however, is unlikely to last. Although many countries have strengthened their economies through improved macroeconomic policies, many lowand middle-income countries are still fragile and could experience sharp economic slowdowns. Goldstein (2005) argues that developments in the global economy over the next few years (such as slower growth in China and the United States combined with higher long-term U.S. interest rates) will reduce growth in emerging markets and possibly cause another series of financial crises. Any such deterioration in emerging markets and developing economies could quickly undermine support for recent economic reforms—even if the reforms actually strengthened economic resiliency. This vulnerability of emerging markets and developing countries to negative external shocks is not new. 1 Changes in the global environment, including higher global interest rates, slower growth in major export markets, and/or worsening terms-of-trade,