A long tail of smaller and low-rated frontier markets is more exposed to rising US bond yields than larger mainstream emerging markets (EMs), reflecting larger external financing needs and high levels of foreign-currency government debt.
We expect the Fed to announce a tapering of its asset purchase program in 2H21, before beginning the taper in early 2022. This and the recent sharp rise in US bond yields have raised the risk of a repeat of 2013’s ‘taper tantrum’. Nevertheless, we expect the rise in US bond yields to be gradual and for global financial conditions to remain supportive by historical standards.
In 2013, there was material spillover to the so-called ‘fragile five’ of Brazil, India, Indonesia, South Africa, and Turkey, which had sizeable current account deficits (CADs). But the decline in capital flows was relatively quickly retraced, as initial fears over the extent of Fed tightening proved overdone and some EMs raised policy rates. None of the five suffered a full-blown balance-of-payments crisis and Fitch did not downgrade any of their sovereign ratings.
The ‘fragile five’ and most large EMs have smaller CADs than in 2013 and only low-to-moderate exposure to external financing risks. Overall, the macro-financial backdrop is more favorable than in 2013.
We forecast the median CAD of the 81 Fitch-rated EMs at 2.0% of GDP in 2021 compared with 3.2% in 2013. Nine EMs will run CADs of 10% of GDP or more this year, but fewer have CADs of more than 5% of GDP compared with 2013.
However, EM Eurobond amortizations of USD78 billion in 2021 are triple 2013’s. Median EM total government debt rose to 62%/GDP at end-2020 from 34% at end-2012, making EM more sensitive to higher global and local interest rates.
Sovereign median foreign currency debt/GDP was 40% at end-2020 for smaller Fitch-rated EMs, up from 19% at end-2012 and compared with 17% now for the largest 30 emerging markets. This would make depreciation against the US dollar more problematic. A record 47% of EM ratings are in the ‘B’/‘C’/‘D’ categories.
Ed Parker is the Head of EMEA Sovereign Ratings with Fitch Ratings