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Higher rates=high risk for emerging markets

Monday, June 24, 2013 - 02:42

June 24 - As rates start to rise, the impact on emerging markets could be severe. Elizabeth Koraca reports.

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As the Fed winds down monetary support - emerging markets are bracing for impact. Michael Woolfolk, BNY Mellon Global Markets: SOUNDBITE: MICHAEL WOOLFOLK, MANAGING DIRECTOR, BNY MELLON GLOBAL MARKETS, SAYING: "I think that we need to appreciate just how important that accommodation is to investment in emerging markets and how important it is to slowly, when we make adjustments, when we turn the monetary corner, we make very gradual adjustments so that you don't startle the horses so there isn't an exit for the door." REPORTER BRIDGE: REUTERS REPORTER ELIZABETH KORACA (ENGLISH) SAYING: "Emerging economies use vast holdings of U.S. Treasury bonds as capital insurance buffers. That could complicate the Fed exit from quantitative easing." Woolfolk says it's not just about the Fed but also the Bank of Japan that has a greater role to play in this. SOUNDBITE: MICHAEL WOOLFOLK, MANAGING DIRECTOR, BNY MELLON GLOBAL MARKETS, SAYING: "These two institutions taken together have provided extraordinary unprecedented monetary accommodation that has provided the cash to invest in these emerging markets. The carry trade has all been reversed here over the course of the last month and a half, leading to some pretty precipitous adjustments in prices. I think they have a role to play in when providing that liquidity and market stability, that money then goes back to emerging markets." Economies across Asia and around the globe have built up huge hard-cash buffers as protection against future 'sudden stops' in foreign financing. In buying up dollars, euros and other hard currency to prevent a rapid appreciation of their own local currencies, emerging central banks have amassed about $7.2 trillion dollars in reserves. But there could be a risk that emerging economies may sell off reserves? Or could those reserves be used as a buffer? Alec Young of S&P Capital IQ: SOUNDBITE: ALEC YOUNG, GLOBAL EQUITY STRATEGIST, S&P CAPITAL IQ, SAYING: "It depends on the country. In South Africa they don't have quite the same reserves as you might see in India or Brazil, so they've had a little bit less success in supporting their currency that way, so it varies. But certainly the reserves in emerging markets are quite large in a lot of the major economies. That's a reflection of their stronger health relative to past cycles, and that will help them to weather this storm better than they might have in the past." But emerging market crises are notorious for taking on a life of their own - mostly due to investor fear of a lack of liquidity. That forces many to pre-emptively protect themselves by exiting early. If that happens, the potential panic will likely require some response in their own countries - or eventually in Washington.