The World Bank warned of the risk of a large decline in capital flows to eerging economies in the upcoming US monetary policy tightening cycle.
If the tightening cycle were accompanied by a surge in US long-term yields, as happened during the taper tantrum in 2013, the reduction in capital flows to emerging economies could be substantial, Xinhua cited a new research paper released by the World Bank ahead of this week’s US Federal Reserve meeting to discuss whether to raise interest rates.
Its research shows a 100 basis point jump in US long-term yields, as occurred during the taper tantrum, could temporarily reduce aggregate capital flows to the emerging markets by up to 2.2 percentage points of their combined gross domestic product (GDP).
Although the paper expected the tightening cycle might be smooth, it still runs a risk of being associated with market volatility, in view of the global economy that is adjusted to weakening growth prospects, slowing international trade and persistently lower commodities prices.
“Risk are compounded by recent spikes in volatility in global financial markets and deteriorating growth prospects in developing economies,” said Ayhan Kose, director of the World Bank’s Development Prospects Group.
“An abrupt change in risk appetite for emerging market assets could become contagious and affect capital flows to many countries,” Kose said.