(Repeat for additional subscribers)
Feb 5 (The following statement was released by the rating agency)
Emerging markets have overtaken eurozone sovereign debt problems and central bank stimulus
withdrawal as the biggest threat to European credit markets, according to European credit
investors in Fitch Ratings' latest quarterly survey.
Sixty-eight percent of respondents to our 1Q14 survey thought adverse
developments in one or more emerging markets would pose a high risk to European
credit markets over the next 12 months. That is a notable increase on the 51%
who identified EMs as a high risk in the previous two surveys. Forty percent of
investors think EM corporates will face the greatest refinancing challenge over
the next 12 months, up from 26% in 3Q13.
Just 39% of respondents thought eurozone sovereign debt problems were a high
risk to European credit markets, down from 57% in our October survey. Half
considered central bank tightening a high risk, down from 56% previously.
EM concerns drove further market volatility during our January survey period, as
country-specific factors such as political risk, weaker economic data and
concerns about the robustness of policy frameworks continued to overlap with
broader worries about capital flows out of emerging markets due to Fed tapering.
Several EM currencies including the Turkish lira, South African rand, Russian
rouble and Hungarian forint fell by more than 5% against the dollar. The
Argentinean peso fell by nearly 19% as the authorities stopped using FX reserves
to support the currency. Our commentaries on these developments and some of the
ensuing policy responses - including rate rises in Turkey, South Africa, and
India - is available at www.fitchratings.com.
A precise relationship between Fed tapering and international capital flows is
hard to quantify, but as long as financial market participants believe tapering
can cause EM outflows, adjustments in currency, equity, and bond markets are
likely. Last week, the Fed cut its monthly bond purchases by another USD10bn, in
line with the rate of tapering it announced last year. In our view, the winding
down of quantitative easing confirms that monetary policy is normalising. EMs
will therefore face changes in the quantity and (equally importantly) the price
of capital available.
We think EM sovereign credit fundamentals are generally stronger than in
previous crises, and credible, coherent economic policy management can support
sovereign credit profiles in the face of further market adjustments. Recent
exchange rate pressure has centred on countries with large current account
deficits, but this may be too narrow a focus. Adding external amortisation and
short-term debt gives a full picture of external funding needs and therefore
vulnerability to investor sentiment. For example, India has a larger current
account deficit than Turkey, but Turkey has more external amortisation and
short-term debt coming due in 2014. Its gross external financing requirement is
Fitch's 1Q14 survey closed on 31 January. It represents the views of managers of
an estimated EUR5.9trn of fixed-income assets. We will publish the full results
later this month.