Moody's Investors Service in its latest report titled Sovereigns -- Global: Likely Fed Rate Hike Reflects Strength of US Recovery, But Exposes Some EM Sovereigns to Volatile Capital Flows, has projected the US Federal Reserve to hike rates by 0.25 percent and has said that the likely interest rate hike by the US Federal Reserve this week could pose risks to some emerging markets.
It said that lower global commodity prices and possible volatility in capital flows will pose challenges to some emerging markets, however a combination of reserve buffers and policy vigilance has the capacity to limit the negative sovereign credit impact. But added that the sovereigns having little policy room to protect growth and buffer themselves from external shocks are likely to be affected the most.
Moody’s said that the most affected large emerging markets and those most at risk going forward have tended to be those such as Brazil, Russia, Turkey and to some extent South Africa, where severe domestic challenges have contributed to exchange rate and financial market instability, and where policy room to buffer external shocks and protect growth is less robust.
The agency though said that “While a Fed rate hike would remove an element of uncertainty for emerging market sovereigns, some will remain at risk to adverse capital flows and investor sentiment. For example, there is a low risk of a disorderly reaction should investors abruptly adjust their expectations for yields.
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