Fitch: US Rate Rise Risks to Large EMs Shift Since Taper Tantrum

Several large emerging markets remain vulnerable to US monetary tightening two years after the "Taper Tantrum", but shifts in macroeconomic backdrops and policy trends have helped relative vulnerabilities diverge, Fitch Ratings says. 

Brazil, India, Indonesia, South Africa and Turkey stood out in 2013 as at risk from capital flight resulting in currency volatility and widening credit spreads as the US Federal Reserve started to consider tapering of asset purchases. 
India's vulnerability has declined. A changing policy environment has had a positive impact on its macroeconomic risk profile. It also still benefits from stronger external balances relative to many of its ratings peers, and, as a large net commodity importer, from the sharp fall in materials and oil prices since mid-2014. 

Indonesia's policy track record has also strengthened, resulting in an improved external profile. But it remains vulnerable to external shocks, in part because of the negative terms-of-trade shock it has faced as a commodities exporter. The extent of its vulnerability will depend largely on the monetary policy stance and Bank Indonesia's willingness to allow the exchange rate to cushion shocks.

In contrast, Brazil and South Africa's macroeconomic profiles have weakened over the past two years. Brazil's external buffers are strong, but it has been slower to embark on macroeconomic adjustment. The current account deficit widened to 3.9% in 2014. Tighter international financing conditions and currency volatility could result in reduced access to external borrowing. 

South Africa has had persistent high twin budget and current account deficits alongside low growth, which has led to growing public and external debt ratios and a sustained high external funding requirement. Reliance on portfolio inflows exposes the external accounts to changes in investor sentiment. 

Turkey's capacity for external rebalancing is demonstrated by various measures, including its falling current account deficit. The country has ridden out previous episodes of volatility with no "sudden stop" of capital inflows, but its reliance on external financing remains large.