Rising Rates May Cause An Unprecedented Capital Flight
With tapper talks intensifying in the United States and Europe, emerging economies are preparing for harder times. A rise in rates in developed economies could lead to a considerable capital flight from riskier, emerging regions to safer, developed economies.
Emerging Markets May Feel The Burn
With interest rates at their lowest levels in years and with the help of the Fed’s massive bond-buying programs, investors have looked abroad for higher returns. However, this may come to an end when rates rise again in the United States.
“Meanwhile, more vulnerable central banks are fortifying their financial systems to ward off the type of capital flight that hit emerging markets during the 2013 “taper tantrum,” which was triggered by mere hints of Fed tightening after years of super-easy policy deployed during the Global Financial Crisis.” by Mfuneko Toyana, Leika Kihara and Karin Strohecker for Reuters
- Brazil’s central bank raised its benchmark rates at its past two meetings and has suggested it will continue to do so as prices rise
- India’s central bank has grown its foreign exchange reserves to $ 600B to help the economy deal with “challenges arising out of global spill overs”
- China’s central bank is trying to control credit growth while keeping the economy running
In Europe, several central banks have already planned future rate hikes. Norway plans to raise rates in the third to fourth quarter of 2021 while Sweden plans to reduce the pace of its asset purchases throughout the year.
BENCHMARK’S TAKE
- Mere hints at rates increases could provoke a capital flight from emerging economies
- In the short term, this could pressure companies located or exposed to emerging markets as capital flies back to the United States
Disclaimer
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.
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