Emerging market challenges unlikely to be overcome quickly: ECB

Key emerging economies have been under strain this year with China's slowdown and rebalancing setting off waves of turbulence on financial markets earlier this year.

Although emerging markets still generate 70 percent of global growth, their growth rate declined for the fifth straight year last year with many key economies likely weighing on growth both in 2016 and 2017, the IMF said earlier.

"Some of these challenges are unlikely to be overcome quickly," the ECB said. "The impact of weak investment, infrastructure bottlenecks and capacity constraints could be stronger than expected."

"The rebalancing process that is under way is necessary to ensure sustainable growth over the medium term, but the transition path is likely to be bumpy and risks will tend to be on the downside," the ECB added.

Potential growth has been declining for years and some indicators suggest that emerging markets were already overheating during their boom years, as suggested by surging private debt ratios.

Risings external debt is a particular concern as countries increasingly rely on foreign currency, especially dollar-based financing, raising stability risks and blunting the positive impact of currency depreciation, a natural defence against economic turbulence, the paper concluded.

Financing conditions for emerging markets have also tightened with capital outflows picking up toward the end of last year, pushing up bond yields, widening credit spreads and weighing down on equities.

Investment growth is also falling and several major emerging economies are running up against demographic problems, facing a dwindling or stagnating workforce, putting downward pressure on growth.