Fed tapering and its effects on emerging economies

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Federal tapering could have significant knock-on effects on emerging markets but a commodities boom could buoy the effects.

“I think you can look at emerging markets one at a time. If you look at Latin America, for example, that might benefit from federal tapering because it shows that the US economy is starting to grow again, and Americans are starting to spend money,” Debtwire CEEMEA senior Africa correspondent John Foster told CNBC Africa.

“If we go across to Africa, you’ve got to look at it on a country by country basis. In Nigeria, for example, federal tapering might be advantageous because it’ll chase out a lot of the hot money that’s been invested in Nigeria in the last year or two. The money that will be left over will be there for sustainable development.”

Foster added that other countries will however be challenged by federal tapering as they heavily rely on external funding, and currently in the red with bad current account deficits.

As a result, a number of emerging and frontier markets have taken to the international debt market in order to fund infrastructure projects or current account deficits.

With tapering slowly unwinding, interest rates could also be affected, and debt incurred could be slightly more expensive.

“Interest rates are going to go up, but it’s not just the emerging market interest rates. In the UK, treasury gilt yields started ticking up after the Federal announcement that they were going to start easing off on the quantitative easing programme. It’s going to make external funding more expensive for Africa, but in many ways the money that’s going to flow out might be replaced by money from other sources,” Foster explained.

An expected growth in South-South investment could be one of the alternative sources of funds.

China is already a major player across the African continent, and other emerging markets are also expected to participate more in Africa’s growth story.

Brazil has had links with Angola and Mozambique for a long period of time, and more Brazilian companies have begun their exodus into Angola’s gas and oil industry.

“You’re also going to see perhaps Gulf Cooperation Council (GCC) investors [looking] at Africa both on a commodities basis but also from the Islamic finance side. Take for example Senegal: [they] had plans to issue a Eurobond and it’s decided it’s probably going to be too expensive to do this year. Instead they’re looking at sovereign sukuk, and trying to issue that on the local market or issue that into the GCC,” said Foster.