The Fed’s shift to a “looser monetary policy” stands to help emerging markets, but those economies are far from out of the woods because of looming risks that include the threat of “heightened U.S. protectionist measures” and “geopolitical tensions,” according to a new S&P Global Ratings report released Monday.
Although the Fed’s “more dovish stance is supporting capital flows” to these markets, “easing financing” woes and “alleviating pressure” on currencies, “key risks” to the emerging market economies also include weaker economic data in developed countries, Jose Perez Gorozpe, the firm’s head of credit research for emerging markets, and Tatiana Lysenko, a senior economist and director, said in the report.
Financing conditions have relaxed for the time being due to the response of the Fed and European Central Bank (ECB) to what was a “weakening growth and inflation outlook, and both central banks are poised to remain highly accommodative this year and next,” the S&P report said.
But the analysts warned that “investors’ appetite for emerging-market risk is increasingly contingent on further monetary easing.” Rising risks to global growth amid trade disputes and geopolitical tensions have prompted moves of both central banks, they said. Amid all the remaining “pressure points and mutually reinforcing factors, investor sentiment toward riskier assets is set to be fragile,” the report said.
Overall “macroeconomic conditions remain soft and outlooks have weakened across key emerging market economies,” the report went on to say, adding: “External and domestic risks persist, and some of the risks to growth that we have previously identified have started to migrate into our baseline.”