Will a “taper tantrum” trounce emerging markets?

Tighter US monetary policy and a stronger dollar could see capital flood out of emerging markets, leaving turmoil behind. 

Are we heading for “taper tantrum 2.0”? asks Duvvuri Subbarao in the Financial Times. In 2013 concern that the US Federal Reserve might cut back – or “taper” – its quantitative easing (QE) programme triggered the “taper tantrum”, a sell-off that hit emerging markets hard; India’s rupee plunged by more than 15%. 

Now, as the Fed flirts with tighter monetary policy once more, policymakers have a feeling of déjà vu. No wonder. Many emerging economies have benefited from ultra-low interest rates in the developed world, which has sent investors looking for higher returns overseas. Tighter US monetary policy and a stronger dollar could see these capital flows swiftly reverse, leaving turmoil in their wake. 

Policymakers in poorer countries don’t just have financial markets to worry about, says The Economist. A global divide is emerging between wealthier countries, which are vaccinating quickly, and poorer nations still struggling to do so. 

“In the world’s poorest 29 economies… only 0.3% of the population has received even one dose of vaccine.” That will hamper growth. Strong recoveries in developed countries are also boosting global inflation. Brazil and Russia have been forced to hike interest rates in response, not ideal given that both countries are still fighting Covid-19. 

The taper tantrum saw the MSCI Emerging Markets index slump by 10% in four months, says Reshma Kapadia in Barron’s. But “things may not be as bad this time”. The 2013 crisis was amplified by trade and fiscal deficits in many emerging economies. With a few exceptions (notably Turkey and South Africa) most are better prepared for market storms today. Commodity exporters are also enjoying a windfall from the ongoing price rally. 

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