Effects of US tapering 'should be minor for sovereigns'
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Industrialised and developing countries alike will experience economic volatility as the US economy continues to recover, but the overall credit implications of tighter US monetary policy are likely to be limited and temporary at the sovereign level, acco
The impact on the creditworthiness of private sector issuers within countries – for instance, riskier banks or corporate borrowers – is likely to be more pronounced.
Moody’s looked at the short-term transmission channels from the prospect of tighter US monetary policy and the consequent impact on the creditworthiness of other issuers.
If sustained, recent movements in financial market prices could be credit negative for a number of issuers outside the US, although the precise impact will depend on financial and economic linkages with the US, and how domestic policymakers respond.
In particular, the impact of potential capital outflows will depend on the nature of a country’s monetary policy regime, and the nature of domestic borrowing.
Moody’s also examined the impact of monetary tightening in the US on growth rates, current accounts and government balances.
This analysis suggests that developing economies that were receiving significant capital inflows prior to the tightening in monetary conditions are most vulnerable to reversals in capital flows.
Countries with large imbalances, mostly developing ones, experience larger negative effects.
Current account effects, in particular, depend on the relevant exchange-rate regime and that country’s export exposure to the US market.
However, in the medium term, improved competitiveness from currency depreciations and greater demand for exports from a stronger US economy will mitigate the negative effects of tapering.
“The recent market volatility indicates some nervousness among investors about the consequences of US monetary tightening,” Lucio Vinhas de Souza, Moody’s managing director and sovereign chief economist, said yesterday.
“However, while this tightening will present short-run challenges for particular countries, over the longer term the adjustment in financial markets should facilitate a relatively swift return to previous growth trajectories.”
Moody’s also said Asia-Pacific Economic Cooperation (Apec) sovereigns are facing several challenges that have emerged in the wake of the global financial crisis, but creditworthiness generally continues to show resilience and stability.
The slow pace of recovery in the advanced economies – with a subdued outlook for those in Europe and a modest recovery for that in the US – is constraining demand for the region’s exports, a key source of corporate profitability and economy-wide employment as well as income growth.
The resurgence of volatility in the global capital markets in anticipation of the eventual unwinding of extraordinary monetary stimulus by the US Federal Reserve is clouding the near-term outlook.
However, Moody’s does not see any balance-of-payments crises in the future, even in those countries whose exchange rates have faced the most pressure since May. Large holdings of official foreign exchange reserves across the board in emerging market Apec and flexible exchange rate policies provide formidable buffers to capital outflows.
