EMs can weather Fed lift-off – problems could come later

With a Fed rate hike sometime this year now widely anticipated, we suspect that any volatility in EM markets when the Fed finally raises rates should prove short-lived. The much bigger risk for emerging markets is that US policymakers tighten policy more aggressively than is currently anticipated, and that this in turn leads to a sudden rise in Treasury yields, a jump in investor risk aversion and a renewed sell-off in EM currencies. Since the “Taper Tantrum” of 2013 the external positions of a number of EMs, notably Thailand, Chile and India haveimproved significantly, which should make them less vulnerable to an outside shock. In contrast, Brazil and Colombia have seen their deficits widen since 2013. These two countries, along with South Africa and Turkey, are likely to be first in the firing line in the event that Fed tightening leads to a renewed selloff in EM assets.