Financial conditions across the emerging world have eased in recent months, as continued policy support from central banks in the developed world has supported risk appetite. This in turn has reduced the immediate threat to emerging economies running large current account deficits. We still think that large external financing requirements are a key source of vulnerability for several EMs (notably Turkey and South Africa) which could be exposed as US interest rates start to move up next year. What’s more, there is a more general risk that the recent calm in financial markets breeds complacency among EM policymakers. But for the emerging world as a whole, we do not expect Fed tightening to trigger systemic problems. Instead, the bigger risks lie closer to home, including China’s frothy property market and rapid credit growth in a number of large EMs, including Brazil.
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