The economic impact of Fed tapering its asset purchases under QE3 later this year on emerging markets (EMs) likely to be limited, local analysis said Thursday.
Wednesday's Federal Open Market Committee (FOMC) meeting cemented expectation that the U.S. Federal Reserves will start to taper its asset purchases under QE3 later this year and has weighed on EMs financial markets Thursday, according to Capital Economics in London.
In a news conference after the Fed wrapped up its two-days FOMC meeting, Ben Bernanke, chairman of Fed, said although the FOMC didn't make immediate changes to the pace of bond purchases, it may vary the pace of purchases as economic conditions evolve.
Capital Economics suspects tapering and then tightening by the Fed will have a limited impact on Ems, for three reasons: first, the removal of policy support in the U.S. is likely to be extremely gradual; secondly, most EMs are now less vulnerable to a deterioration in external financing conditions than in the past; finally, to the extend the Fed does tighten policy, it will be due to a strengthening US economy, this could support growth in many EMs - notable Mexico.
A handful of countries with large external financing requirements are vulnerable, but most EMs have cut their dependence on overseas borrowing over the past decade, said the economic analysis company in its latest reports.
"Meanwhile, although the major EM economies are slowing, this is due to domestic problems rather than the scaling back of policy support in the developed world," the report argued.
The big theme in EMs over the coming years will be the shift to slower growth in the major BRIC (Brazil, Russia, India and China) economies. This is the result of structural flaws in each economy's growth model - not changes in U.S. monetary policy, added Capital Economics.