The impact of the withdrawal of quantitative easing, or QE tapering, is varying from country to country, but those with external imbalances or a reliance on external funding have been most vulnerable. Specifically, Moody's says that QE tapering is most likely to have a negative impact on countries that lack buffers such as hard currency reserves or policy tools such as a floating exchange rate.
However, Moody's expects that the negative impact of QE tapering on these countries will likely be temporary and part of the adjustment process to normalization of monetary policy in advanced economies.
The currencies of South Africa and Turkey have so far been hardest hit by capital flow adjustments resulting from QE tapering. This is due to country-specific features, such as relatively larger current account deficits, lower-than average total hard currency reserves and lower official interest rates.
Brazil has so far not been affected because it began its own tightening cycle much earlier than other countries --and just before the Fed announced its tapering plan in May 2013, says Moody's. Russia's current account surplus and larger hard currency reserves have so far shielded it from the tightening in global liquidity.
"Recent events confirm previous expectations that the tapering process and its associated increase in US 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 Lio 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."
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