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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 therefore higher.
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.