ALERT-S&P warns on EM risks from Fed hikes

The notion that the US Federal Reserve is very likely, at some point fairly soon, to raise interest rates, should not come as a surprise to anyone who has been paying attention since 2013. But it still poses a big risk to emerging markets, says ratings agency Standard & Poor’s

The prospect has been known since May 2013, when then Fed chair Ben Bernanke gave the first warning that the Fed would start reeling in its stimulus.

Still, now, the ratings agency cites “a reduction in global liquidity as the US Federal Reserve eventually raises interest rates” as one of the three key risks facing emerging markets. The others are an unwinding of excessive domestic credit and a “marked slowdown of Chinese economic growth.”

Says Moritz Kraemer, S&P’s sovereign global chief risk officer.

Venezuela, Argentina, Turkey, Colombia, and Peru are the emerging market sovereigns that may be the most vulnerable currently to the combined effect of the three key risks of tightening global liquidity, financial deleveraging, and a Chinese slowdown. Mexico, Poland, and the Philippines appear to be least at risk.

Latin American sovereigns are, on average, more vulnerable than sovereigns in Asia in each of the three risk categories.