The Fed Quake: Who will bear the BRuNTS

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Franklin D. Roosevelt famously assured the world that “we have nothing to fear but fear itself”. Knowing in hindsight how bold this American president was, it would be fair to assume that FDR did not fear his own FED. But we do, don’t we?

By ‘we’ I refer at least to those countries and industries that are dependent on abundant, cheap financing and do not have many buffers to absorb the interest rate hike when it arrives. And it will arrive.

The Federal Reserve (Fed) will tighten its monetary policy by the end of 2015, or maybe in 2016. 

On one hand, as we explained in our Economic Insight titled the Fed Quake, compared to previous tightening cycles, communication has been more transparent and expectations are better managed. This telegraphed tightening cycle will be gradual.

Then again, when the rise arrives, financial instability in Emerging Markets running large current account deficits will increase as a consequence of capital outflows and higher cost of financing in USD.

However, our Economic Research team of analysts does not expect collective crashes à la the 1990s. Abundant global liquidity and foreign exchange reserves make countries more resilient to external shocks.

And still, shocks will take place, shaving off between 0.2 and 0.5pps of GDP growth in some countries. The BRuNTS (Brazil, Russia, Nigeria, Turkey and South Africa) are the most vulnerable with weak underlying growth drivers and constrained policy-making.

The MIMiCC (Mexico, Indonesia, Malaysia, Colombia and Chile) should experience a rough 6 months due to lower revenues from commodities and strong reliance on short-term capital inflows.

Last, the CIPPeT (China, India, Poland, Philippines and Thailand) should be relatively spared.

So going back to what FDR said in the next (and less famous) part of his inaugural speech. People, he preached, should only dread “nameless, unreasoning, unjustified terror”.

Perhaps these words could resonate nowadays with the business community – and political leaders. Apprehension is understandable, and sometimes even justified. But sheer horror is best kept for special occasions.

 

Ludovic Subran

Chief Economist

Euler Hermes

If you would like to learn more about Euler Hermes in your country or near you, feel free to visit our countries’ pages.

 


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On Thursday, October 12, 2017