EMs as vulnerable to taper tantrum as in 2013 | Economic Times

Mumbai: Emerging markets are not in a more resilient position now compared to the ‘Taper Tantrum’ of 2013, said Nomura. The firm said instead of the ‘Fragile Five’ that includes Brazil, India, Indonesia, Turkey, and South Africa of 2013 taper tantrum, there is a risk of troubled 10 countries this time as economic fundamentals in many EM countries have deteriorated, heightening the financial risk as global rates rise.The phrase ‘Taper Tantrum’ refers to the panic in global markets in 2013 in response to comments by the then US Federal Reserve chairman Ben Bernanke on cuts in bond purchases, known as Quantitative Easing. Similar concerns have resurfaced amid growing noises that the American central bank might taper its gigantic liquidity programme, which was brought in in March 2020 to cushion the US economy from the effects of Covid-19-induced disruptions. “...we now warn of the “troubled ten”— Brazil, Colombia, Chile, Peru, Hungary, Romania, Turkey, South Africa, Indonesia and the Philippines. We believe the economic fundamentals in many EM countries have deteriorated,” said Nomura’s analysts Rob Subbaraman and Rebecca Wang in a recent note to clients.In August 2013, a handful of emerging market countries were dubbed ‘Fragile Five’ by Wall Street as their economies were vulnerable in the wake of widening current account deficit and plunging currencies.“EMs have developed new sources of vulnerability, with a combination of chronically weak growth, rising inflation and a marked deterioration in fiscal finances, and yet real policy rates remain deeply negative in many EM countries,” said Nomura.The brokerage said the prospect of the US Federal Reserve normalising monetary policy amid China’s slowing economy is a ‘dreadful combination’ for emerging markets, only to be made worse by growing emerging market bank-sovereign debt nexus. It said emerging markets’ extraordinarily large fiscal deficits will likely leak into sizeable current account deficits.“We debunk the idea that, just because EMs have attracted smaller cumulative portfolio inflows since Covid-19, it is less susceptible to large capital flight,” said Nomura.The foreign brokerage said amid the ongoing pandemic, current account deficits are smaller or have turned into surpluses, foreign exchange reserves have been built up and there has been a smaller cumulative build-up of portfolio inflows.