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Fed tapering could hit SA banks hardest

Paris - Banking systems in South Africa and Turkey are the most vulnerable to the impact of the US Federal Reserve's tapering program, Standard & Poor's said on Wednesday.

It looked at seven emerging market countries for the report.

The Brazilian banking system is likely to continue feeling the indirect impact through a worsening of the country's economic slowdown according to the report.

"We expect the banking systems in Chile, India, Indonesia and Peru to remain relatively resilient," Standard and Poor's said in a statement.

Standard & Poor's believes the Fed will continue tapering its programme throughout 2014, possibly ending it by October.

"At that point, the Fed is likely to start normalising US monetary policy through interest rate increases by the second quarter of 2015," said Standard & Poor's.

"While our base-case scenario assumes that the Fed's gradual removal of unconventional monetary support won't derail the economic recovery in developed countries, we expect emerging markets to experience episodes of instability."

In particular, countries whose economies display significant external vulnerability, such as a large current account deficit or net external debt, will have a more difficult time coping.

Vulnerabilities

The seven countries covered in the report, including SA, were selected, because of the external vulnerabilities of some of them and recent trends in market indicators such as foreign exchange rates and the cost of refinancing of banks' external debt.

"Banking systems can feel the impact of tapering directly through more limited access to external funding or through increasing costs to refinance external debt," said Standard and Poor's.

"They can also feel it indirectly through possible central bank interest rate increases, due to currency depreciation and lower capital inflows through the financial account of their balance of payments, which may weigh on economic growth."

That, in turn, could hurt asset quality and profitability.



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