Fed lift-off poses threat to vulnerable emerging markets: Fitch

Fitch Ratings said yesterday emerging markets (EMs) are becoming an increasing source of risk to global growth as the collapse in commodity prices and political shocks exacerbate a secular slowdown. 

In its latest forecast for global growth, 2.3% in 2015 is the weakest since the global financial crisis in 2009 Fitch said. Against this backdrop, the Fed’s looming tightening of monetary policy after an unprecedented period of historically low rates will add to the macroeconomic and external financing pressures on EMs.     

EM bonds were boosted in the last decade by international investors’ search for yield and increased funding disintermediation in local debt markets. This makes EM borrowers vulnerable to rising US rates and the reversal of previously strong capital flows. Fitch reviewed 19 EM countries, selected based on their weights in the J.P. Morgan EMBI and CEMBI indices, to identify cross-sector sensitivities to rising US rates. All but one is rated investment grade but almost one-third is on the edge at ‘BBB-’.

Fitch Ratings has published the special report “Fed Lift-Off: Emerging Market Cross-Sector Risks” to discuss these issues in more detail, as well as an interactive map highlighting cross-sector vulnerabilities for 19 EM countries.