It is cautioned that if the country does not meet local demand for foreign exchange, then the exchange rate will be pressured into a rolling fall, right out of the rate. For small countries, pegging the exchange rate would result in no speculative flight of foreign exchange.
Credit controls on lending could also be implemented in limiting the imports of foreign goods beyond the current limits so as to prevent a drain on reserves.
It is noted that foreign-exchange reserves in several countries have shrunk over the last year, according to Economist. The diminished reserves are likely caused by commodity prices, previously a big cash cow for emerging markets, and the currencies of emerging countries that are now under pressure.
Problems in the emerging market countries may adversely affect ETFs such as:
- iShares MSCI Emerging Markets Index (EEM): down 51.6% year-to-date
- Vanguard Emerging Markets Stock ETF (VWO): currently down 54.9% year-to-date
- PowerShares MENA Frontier Countries (PMNA): currently down 50% since its July 22nd inception