Here’s another interesting chart from Mckinsey Global Institute.
According to their report titled “QE and ultra-low interest rates: Distributional effects and risks”, notes that countries heavily dependent on foreign investors and with large current account deficits are most vulnerable to events like Fed tapering.
As we all saw earlier this year, emerging markets suffered a jolt in the summer when the US Federal Reserve announced that it might begin to wind-down its mammoth $85 billion-a-month monetary stimulus.
As the Mckinsey report notes, “To maintain long-term stability of capital flows, FDI (foreign direct investment) is a more effective way to finance external deficits as this type of long-term investment does not fluctuate heavily in response to short-term economic developments. FDI has an additional advantage in that it brings new technologies and management capabilities.
“Purchases of bonds by foreign investors, especially short-term bonds, are a much less stable way to finance external deficits. As we have noted, countries that have experienced large inflows of capital into their bond markets may be vulnerable, especially if they are also running large current account deficits.”
Which countries face the highest danger of capital outflows if the Fed decides to taper? According to the chart below, India, Indonesia, Turkey, South Africa, Chile, Columbia, Poland and Ukraine are the most vulnerable among emerging markets, according to the report.
Although some countries, such as India and Indonesia, have taken steps to reduce their current account deficits, their economies continue to exhibit other pressure points, which could worsen if there are heavy-duty capital outflows.