LONDON/NEW YORK (Reuters) – Ratings agency Fitch expects the Federal Reserve to dial back its COVID-19-related economic support measures starting early next year, warning that some of the world’s poorest countries were exposed to the risk of another ‘taper tantrum’.
Fitch said it expected the U.S. central bank to announce a tapering, or easing down, of its asset purchase programme in the second half of this year before starting the process early in 2022.
“The outsized role of the U.S. dollar in EM lending and global credit markets means that higher U.S. yields will feed through to a higher cost of EM borrowing in foreign and local currency,” research from Fitch said on Thursday.
“There is also a risk of self-fulfilling market dynamics generating volatility.”
Fed Chair Jerome Powell said on Wednesday that a temporary surge in U.S. inflation, expected this year to hit 2.4%, above the central bank’s 2% target, will not change the Fed’s pledge to keep its benchmark overnight interest rate near zero.
Most large emerging market economies have smaller current account deficits than back in 2013 during the previous ‘taper tantrum’ and they also have low-to-moderate exposure to external financing risks, Fitch said.
That said, conditions at emerging market economies, especially the smallest EMs, could trigger a spike in borrowing costs.
EM foreign currency bond amortisations of $78 billion in 2021 and median EM total government debt at 62% of GDP last year – from 34% at the end of 2012 – make EM “more sensitive to higher global and local interest rates,” Fitch said.
(Reporting by Marc Jones, Editing by Karin Strohecker and Paul Simao)