US Fed tapering fears: What it means for emerging markets

The U.S. Federal Reserve is gearing up for a two-day meeting this week, and all eyes are on U.S. Federal Chairman Jerome Powell's comments, especially concerning the potential tapering of bond purchases. Fitch ratings have issued a warning that some of the world's poorest countries could be at risk of another taper tantrum if higher bond yields in the U.S. result in increased borrowing costs for emerging markets. Dayo Amzat, the Managing Director and CEO of Zedcrest Capital, recently joined CNBC Africa to shed light on the potential impact of these developments on global financial markets and emerging economies. Amzat emphasized the delicate balance required in tapering measures to avoid creating a contagion effect on vulnerable emerging markets. Reflecting on the prolonged bullish trend in financial markets over the past decade, largely supported by accommodative monetary policies, Amzat highlighted the need for a cautious and gradual approach to tapering to mitigate potential shocks. While analysts do not expect immediate tapering, the prospect has already stirred market reactions. Amzat projected a likely delay in any tapering announcement until Q1-2022, with a modest start to reducing bond purchases. He underscored the importance of the U.S. Fed's support in stabilizing asset prices and easing financial conditions for troubled economies like Nigeria. Despite the looming tapering discussions, Amzat suggested that emerging markets have benefited from a liquidity-fueled rally in asset prices, driven by global investors seeking higher yields amidst a low interest rate environment. He cited Ghana's successful $3 billion bond issuance as a testament to investor risk appetite in emerging markets. With Nigeria eyeing Eurobond plans amid fiscal challenges and currency uncertainties, Amzat acknowledged the attractiveness of Nigerian assets in the current market climate. However, he cautioned that any shocks from tapering could trigger a reversal in investor sentiment. On the topic of investments, Amzat responded to recent reports from the Nigeria Investment Promotion Council indicating $8.4 billion in announced investment inflows in Q1, with a focus on the manufacturing sector. While recognizing the potential of announced investments, Amzat emphasized the importance of distinguishing between announced and realized investments in the country. He pointed to the need for tangible actions to materialize investment projects, such as the $40 billion gas project in Nigeria. Amid challenges in foreign direct investment flows, including a decline in 2020 attributed to the pandemic, Amzat expressed cautious optimism for increased investment activity in Nigeria, driven by projects like the Marginal Field program and gas initiatives. Despite the hurdles faced in attracting foreign capital, Amzat believes Nigeria could see a resurgence in investment flows with strategic project implementation and sectoral growth. As global markets brace for potential tapering impacts, Amzat's insights reflect a nuanced outlook on emerging markets' resilience and the need for prudent policymaking to navigate evolving economic landscapes.