Moody’s: Possible Fed rate hike shows potential volatility in emerging markets, including Turkey
NEW YORKA rise in the short-term interest rate target by the Federal Reserve (Fed) could occur late on Sept. 17, and such a move would contribute to downside risks for some emerging market sovereigns, particularly those more reliant on foreign investors, said rating agency Moody’s in a research note on Sept. 17.
Although lower global commodity prices and possible volatility in capital flows will pose challenges to some emerging markets, a combination of reserve buffers and policy vigilance has the capacity to limit the negative sovereign credit impact, said the note.
“The most affected large emerging markets and those most at risk going forward have tended to be those such as Brazil, Russia, Turkey and to some extent South Africa in which severe domestic challenges have contributed to exchange rate and financial market instability, and where policy room to buffer external shocks and protect growth is less robust,” stated Moody’s.
The direct impact on the U.S. economy from a rate hike will be minimal as the Fed funds rate will rise by only a likely quarter of a point, and further rises will be very gradual, according to the note. Any rise in borrowing costs will also be minimal, but short-term T-notes, T-bills may go up modestly, it added.
Emerging market sovereigns face varying degrees of exposure to rising U.S. interest rates, with those possessing limited buffers and policy space being most at risk to adverse capital flows and investor sentiment, according to the note.
The biggest downward currency moves among the largest emerging markets during the course of 2015 occurred in Brazil, Turkey, Russia, South Africa, Mexico, and Indonesia, with an average depreciation against the dollar of about 17 percent since the beginning of the year, said Moody’s.