According to credit rating agency Fitch’s updated heat map, large emerging markets, which are sometimes considered to be most at risk from tighter US monetary policy, are exhibiting fewer signs of vulnerability to a drop in capital inflows than some of their smaller counterparts.
This suggests the so-called “fragile five” (Brazil, India, Indonesia, Turkey and South Africa) are not necessarily most at risk from a tightening by the Fed, although this will ultimately be determined by a range of factors, some of which are less quantifiable, the agency said.
Fitch expects the Fed to start raising interest rates before the end of 2015 and sees no definitive set of indicators that suggest risks to emerging markets.
The rating agency suggests that fears about a sudden reversal of capital inflows to emerging markets may be exaggerated. While perceptions of huge inflows generated by ultra-loose US monetary policy may be misplaced, Fitch says it does not expect a systemic emerging market crisis.
However, the rating agency emphasises that the Fed tightening interest rates will exacerbate the macroeconomic and external financing pressures on emerging markets. On the other hand, it points to the importance of measurable variables such as current account deficits and reserve buffers, macroeconomic frameworks and policy responses.
Fitch says other challenges facing emerging markets could affect their overall vulnerability to shocks. Among the “fragile five,” for example, Indonesia is affected by lower commodity prices and Brazil by recession and rising government debt, the agency added.