The impact of tighter U.S. monetary policy on the creditworthiness of other sovereigns may be negative, but should be short-lived, says Moody’s Investors Service in a new report.
The rating agency says that both developed and emerging market countries will likely experience some economic volatility as the U.S. economy continues to recover. However, it notes that the overall credit implications of tighter U.S. monetary policy are likely “to be limited and temporary at the sovereign level.”
“The recent market volatility indicates some nervousness among investors about the consequences of U.S. monetary tightening,” says Lúcio Vinhas de Souza, Moody’s managing director and sovereign chief economist. “However, while this tightening will present short-run challenges for particular countries, over the longer term the adjustment in financial markets should facilitate a relatively swift return to previous growth trajectories.”
The report notes that recent movements in financial market prices could be negative for a number of foreign countries, “although the precise impact will depend on financial and economic linkages with the U.S., and how domestic policymakers respond,” it says. “In particular, the impact of potential capital outflows will depend on the nature of a country’s monetary policy regime, and the nature of domestic borrowing.”
Moody’s says its analysis suggests that developing economies that were receiving significant capital inflows prior to the tightening in monetary conditions are most vulnerable to reversals in capital flows. “However, in the medium-term improved competitiveness from currency depreciations and greater demand for exports from a stronger U.S. economy will mitigate the negative effects of tapering,” it says.
It also observes that the impact on the creditworthiness of private sector issuers within countries, such as riskier banks or corporate borrowers “is likely to be more pronounced.”