India, Philippines may see outflows on surging yields
India and the Philippines have lower buffers against such external shocks, noted S&P
India and the Philippines are most vulnerable to rising yields in the US, which could trigger disorderly capital outflows from Asia’s emerging markets, rating agency S&P Global Ratings said on Wednesday.
“The effect of $1.9 trillion in stimulus on US inflation and rates remains uncertain. Markets can react in a non-linear way if inflation expectations surge above central bank targets and imminent tightening is priced in. In this case, we may see real yields (rather than inflation expectations) jump and the US dollar appreciate at the same time. In our view, this would trigger disorderly capital outflows from Asia’s emerging markets. India and the Philippines are the most vulnerable at the current juncture,” the rating agency said in a report.
Economies with lower buffers against external shocks are India and the Philippines and both have seen inflation rise in recent months, S&P said.
“Real policy rates are below long-run average levels, eroding the return buffers. Capital may be quicker to leave and central banks may have to raise policy rates. One mitigating factor for both countries is that current accounts are stronger than normal levels. However, normalizing growth will raise investment demand, increase external funding requirements, and push current account balances into deficit,” it cautioned.
When the Federal Reserve indicated in May 2013 that it might dial back its quantitative easing programme, conditions in the emerging Asian economies were ripe for an episode of external funding stress that led to the “taper tantrum”.
The period between May and September 2013 saw a reversal of capital flows and forced tightening in external balances in affected economies. Currencies and bonds sold off, while implied volatilities on forex rates spiked as investors rushed to hedge their currency exposures. Within the region, India and Indonesia were hit the hardest. These two economies were among the “Fragile Five” of the hardest-hit global emerging markets comprising India, Indonesia, Brazil, Turkey, and South Africa.
In response to this external stress, central banks in India and Indonesia tightened monetary policy and domestic liquidity conditions, using a combination of tools including policy rates and unsterilized forex intervention. The Reserve Bank of India (RBI) raised the marginal standing facility rate by 200 basis points in July 2013 while leaving the policy rate unchanged. This increased the penalty for any bank needing to tap the central bank for overnight liquidity. RBI noted that the liquidity tightening measures were aimed at checking undue volatility in the forex market.
However, S&P expects the stimulus-led recovery lifting yields in the US to affect the financial conditions of Asian emerging markets and growth less than during the “taper tantrum” of 2013.
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First Published:17 Mar 2021, 01:21 PM IST
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