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Developed market central banks turning more hawkish on emerging markets - economist

Cape Town - Capital flows to emerging markets (EMs) have held up well, but developed market (DM) central banks are turning more hawkish, according to Herman van Papendorp (head of investment research and asset allocation) and Sanisha Packirisamy (economist) at Momentum Investments.

They point out that, according to the Institute of International Finance, emerging markets have managed to attract around $160bn in foreign portfolio inflows during the first half of 2017.

However, DM central banks are switching their rhetoric towards a more "hawkish" stance.

"Monetary conditions are expected to tighten across DMs, with the US Fed looking set to announce the start of its balance sheet reduction by September this year, while the European Central Bank (ECB) is also likely to signal a tapering in its asset purchases in September 2017," said Packirisamy.

READ: Slower growth for emerging market bonds in 2nd half of 2017 - analysts

"A relatively high real interest rate (nominal interest rates less inflation) differential between EM and DM, a favourable commodity price underpin and generally low global risk aversion could prevent a large unwind in these flows, particular if central bank moves are well signalled in advance."

In her view, EMs also appear to be more financially resilient this time around compared to the May 2013 "taper tantrum", when investors panicked in reaction to the Fed’s indication of forthcoming tapering of asset purchases.

"Financing gaps across EM have fallen, while external deficits have improved. Measures of short-term debt relative to foreign exchange reserves, in addition, look healthy," said Van Papendorp.

"Moreover, the growth differential between EM and DM should improve in the medium term. This should help to offset a tightening in DM monetary policy, in the absence of a negative shock in volatility or a faster unwind in policy than predicted."

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