Emerging market assets around the world rallied following the US Federal Reserve's announcement on September 18 that it has delayed the reduction of its bond purchase programme. The move opens the way for several emerging market sovereigns mulling new issues.
The Fed was widely expected to launch a programme of "taper-lite", easing its monthly $85bn bond purchases by $10bn or so. However, the US central bank said instead that it needs to see more signs of lasting improvement in the economy. That means emerging markets can look forward to more cash to lift their bond markets as investors resume their hunt for yield.
The leading emerging market currencies such as the Turkish lira and the Brazilian real were up by just under 2% within minutes of the announcement. Likewise bonds rallied by 10-15 basis points (bp). "The surprising Fed decision [on September 18] will give further momentum to the EM rally/recovery and we are seeing EM forex and likely other assets rally hard, as investors close shorts, and we see cash being put back to work," Tim Ash of Standard Bank said in a note.
Back at the start of the year, the threat of losing the momentum offered by the Fed's cash pulled up the emerging market bond rally that had kicked off for real in the second half of 2012. However, US policymakers now appear to have put off the start of tapering until December at the earliest. They said they don't expect an increase in the benchmark lending rate until 2015, according to projections released September 18, and the Fed Funds rate target for the end of 2016 is just 2%.
As the initial shock of the tapering threat wore off in recent weeks, several countries have said they would like to return to the bond market. Russia tapped investors with a $7bn Eurobond issue last week, while Hungary on September 17 opened its options on an issue of up to $5bn in the US. Other more exotic bonds in the pipeline include a debut from Armenia, while Kazakhstan has said it might return to the international markets after a long break.
The delay of tapering will be a welcome relief for those emerging markets with large current account budget deficits, as they were set to be the hardest hit by rising interest costs and a return to "risk off" investing that comes with rising US interest rates. "In the credit space we are now likely to see a wave of EM issuers come to market to take advantage of still very cheap financing conditions and likely pent up demand from investors. This is a life line for the high rolling credits still in EM space such as Turkey, Serbia and Ukraine," said Ash.
Ukraine and Belarus in particular are perilously close to the edge of the abyss. Kyiv announced this week that reserves have dropped to just $21bn - from $37bn in April - and analysts are becoming increasingly alarmed by the rapidly deteriorating situation. Belarus looks extremely close to another financial crisis, with interbank rates having risen to just under 100%, up from 40% a few weeks ago.
The doves at the Fed have bought these countries some time, and a chance to pad their coffers with some fresh and badly needed borrowing. However, in the longer term the delay is probably bad news.
Charles Grave of GK Research argues that the Fed is panicking. "The Fed knows that its policies are failing and, like any bad trader in trouble, it is doubling-down. And of course, the Fed's panic is causing the US dollar to weaken, which means the US will have less global purchasing power, and the US current account deficit will continue to improve. In the long run, that is very dangerous for the global economy," he claimed in a note.
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