Emerging markets with external imbalances are feeling the effects of the reduction in the U.S. Federal Reserve Board’s bond buying program, says Moody’s Investors Service in a new report.
The rating agency says that reduced global liquidity due to the Fed’s gradual tapering of its quantitative easing (QE) policy is having a variable impact from country to country, but countries with external imbalances or a reliance on external funding have been “most vulnerable” to its effects.
So far, the currencies of South Africa and Turkey have been hardest hit, it notes, citing country-specific features, such as relatively larger current account deficits, lower-than-average total hard currency reserves, and lower official interest rates.
However, Moody’s says that it expects that the negative impact of QE tapering will likely be temporary. And, it says that the impact is part of the adjustment process as monetary policy in advanced economies is normalized.
Brazil has not been affected because it began its own tightening cycle much earlier than other countries, Moody’s says. And, Russia’s current account surplus and larger hard currency reserves have also shielded it, it adds.
“Recent events confirm previous expectations that the tapering process and its associated increase in U.S. and global financing costs will, on average, have a considerably greater impact on countries in emerging markets than on advanced countries,” says Moody’s sovereign chief economist, Lúcio Vinhas de Souza.
“Emerging market countries are among the most exposed to a reduction or reversal of financial flows given that they were the recipients of large amounts of capital during the quantitative easing period.”