Research Briefing | Aug 27, 2021

Institutional erosion a hidden risk in event of QE tapering

Institutional erosion a hidden risk in event of QE tapering

While we don’t expect the looming announcement of QE tapering by the US Fed to trigger a sharp rise in US yields a la 2013’s ‘taper tantrum’, it is impossible not to have flashbacks to those days. Back then, Latin America had only one delegate in what became known as the ‘Fragile 5’ group of vulnerable EMs. Eight years later, however, the region is in an even weaker position to withstand another EM sell-off.

What you will learn:

  • Colombia is in the weakest position in LatAm to withstand another sell-off. Like Brazil eight years ago, Colombia has all the ingredients – rising twin deficits, social unrest, polarized elections – to be extremely vulnerable once liquidity dries out.
  • Another source of risk is the potential for institutional erosion in all major LatAm countries. Given the recent profound political changes in Chile and Peru, these two markets should no longer be ‘safe havens’ for investors.
  • Mexico has been considerably more stable than its peers in South America. AMLO’s ‘cold war’ with the private sector brought investment to halt, but his draconian austerity policy gives bondholders no reasons to complain. No wonder Mexican assets outperform even as growth disappoints.
Back to Resource Hub

Related Services

Post

Names will never hurt me –EM monetary credibility remains intact

Emerging market (EM) central banks' credibility to restrain inflation over the medium-term horizon remains intact despite the tests it's been subjected to in an age of supply shocks and massive income disappointments – and despite name-calling by some banks' political masters.

Find Out More

Post

Tight labour market and firm pay growth will worry the MPC

Contentious new Labour Force Survey data implies the UK jobs market was much tighter in H2 2023 than we previously thought, while our own sentiment data developed with Penta suggests conditions are little changed in early-2024.

Find Out More