HOW VULNERABLE IS EMERGING MARKET DEBT TO FED TAPERING IN 2022?
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Perspective from
Franklin Templeton
Fixed Income
HOW VULNERABLE IS EMERGING
MARKET DEBT TO FED TAPERING
IN 2022?
December 2021 The announced start of Fed asset purchase tapering has left some market participants
concerned that emerging markets (EM) are vulnerable to a repeat of the 2013 “taper
tantrum”. In this paper, we argue that emerging market debt (EMD) as an asset class is in a
stronger position to weather the tightening of US monetary policy in 2022. We observe
several fundamental and technical differences compared to 2013 that contribute to this
relative resilience. They include improved balance of payments dynamics in EMs and a
reduced reliance on external sources of finance; less vulnerable technical positioning within
EM bond markets, including via lower share of foreigner participation; and a relative
reduction in EM corporate leverage. We acknowledge that the relative global growth environ-
ment is not necessarily as favorable for EMs as it was back in 2013–2014, though we
observe that EM central banks have learned valuable lessons following the experience of the
taper tantrum. In our assessment, swift and prudent monetary policy action in EMs that
preceded the most recent taper announcement bodes well for EMD markets. Given these
factors, we do not expect Fed tapering to be a catalyst for a meaningful episode of EMD
selloff. The balance of risks favors hard-currency (HC) bonds over local-currency (LC) bonds,
in our view.
TAPER TANTRUM: 2013 VS. 2022
Following a year of speculation, the Fed opened the door in September to start tapering its
asset purchase program as early as mid-November 2021. This announcement, which
was confirmed at the latest Federal Open Market Committee (FOMC) meeting on November
3, responds to the Fed’s concerns over inflation pressures and the observed strengthening
of the labor market. More precisely, the Fed views inflation as transitory but admitted
that it was lasting longer and had a more uncertain future path than expected. In addition,
the US economy has seen a marked strengthening of the labor market, with US
employment having rebounded strongly following the COVID-19 pandemic. At present,
the Fed’s balance sheet stands at US$8 trillion, more than double the size in December
2013 (US$3.7 trillion), when former Fed Chair Ben Bernanke similarly began a tapering of
asset purchases.
Fed tapering not only reduces the amount of US monetary accommodation, but it also
acts as a forewarning of tighter policy rates in the future. The combination of projected
reductions in asset purchases and the possibility of higher rates in 2013 led to a period of
high volatility and rising rates in global bond markets—an episode that became known
as the taper tantrum. But how did the taper tantrum affect the US Treasury (UST) and EM
bond markets in 2013–2014? And can we extract any valuable lessons for EM bond
markets in light of the new taper that started in mid-November 2021?
To answer these questions, we examine the asset price response to the taper back in 2013
and 2014, identifying two distinct time periods: first, the period that ran from the
May 22 to December 18, 2013, which we define as “Bernanke’s taper talk”; and second,
the period that ran from December 19, 2013, to mid-October 2014, which we define
as “Yellen’s taper.”
• Bernanke’s taper talk (2013): On May 21, 2013, former Fed Chair Bernanke gave the
first public signal that a taper was on the horizon, surprising financial markets, and
triggering a selloff that pushed the yield on 10-year USTs up by 10 basis points (bps) to
2.02% that same day. Following the June FOMC meeting, Bernanke then elaborated
on the plan for tapering, and yields rose more substantially, eventually hitting 2.9% on
September 10. Spreads on two-year and 10-year USTs (2s10s) widened to 266 bps
(Exhibit 1 on the next page). This occurred despite efforts by Bernanke and other FOMC
members to emphasize that any reduction in asset purchases would be gradual
and that an increase in the Fed’s target for short-term rates was not imminent.
Additional volatility followed until December 18, 2013, which is when the Fed officially
began to taper.
• Yellen’s taper (2014): On December 18, 2013, the Fed began to taper, reducing the
pace of asset purchases from US$85 billion to US$75 billion per month. Purchases
were then reduced by a further US$10 billion at each subsequent meeting. (Janet Yellen
took over as Fed Chair in February 2014.) The asset purchase program ended in
October 2014, and the Fed began shrinking its balance sheet in October 2017 (for a
total of US$0.64 trillion until the fourth quarter of 2019). During the entire 2013–2014
period, the UST yield curve bear flattened, with spreads on 2s10s and 10s30s
(30-year yields minus 10-year yields) tightening by 114 bps and 113 bps, respectively
(Exhibit 2 on the next page).
The performance of EM bond markets was mixed over the taper tantrum period. As can be
observed in Exhibit 3 on the next page, during Bernanke’s taper talk the total return
of the JPMorgan EMBIG Diversified Index fell by 5%, dragged by both investment-grade
(IG; –6.1%) and high-yield (HY; –2.8%). However, total returns fully recovered during the
2014 period of “Yellen’s taper,” lifted by HY sovereign bonds. By contrast, in the LC
space, the total return of the JPMorgan GBI-EM Broad Diversified Index remained negative
throughout the entire 2013–2014 period, with the most notable drawdown during the
taper talk phase. Most of this underperformance was driven by weaker EM FX (foreign
exchange). The FX selloff was most acute in 2014.
2 How vulnerable is emerging market debt to fed tapering in 2022?
THE TAPER TANTRUM OF 2013–2014 TRIGGERED A BEAR FLATTENING OF THE UST YIELD CURVE
Exhibit 1: The rally in long-end USTs started with tapering Exhibit 2: Triggering a bear flattening of the UST yield curve
2013–2015 2013–2014
Percent Basis points Basis points
3.5 280 300
3.03 265
260 250 223
3.0 240 200
Fed announces tapering 151
Fed completes tapering 220 150
110
2.5
200 100
2.19
Ben Bernanke alludes 180 50
2.0
to tapering in 160 0
Congressional testimony
1.5 140 -50
120 -100
-114 -113
1.0 100 -150
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 2s10s Spread 10s30s Spread
10-year UST yield (left) 2s10s spread (right) ■ 2013 ■ 2014 ■ 2014-13
Sources: Bloomberg, FT Fixed Income Research.
EM HC AND LC BOND MARKETS RALLIED DURING “YELLEN’S TAPER” BUT EM FX WAS WEAK
Exhibit 3: IG underperformed HY in the HC space Exhibit 4: FX performance remains a vulnerability for LC returns
As of October 31, 2021 As of October 31, 2021
Returns % Returns %
8 7.2 8
6 5.3
6 5.0
4.0 4
4
2
2 1.2 0
0 -2 -1.4
-1.0 -3.0 -3.4
-2 -4
-4.7 -4.7
-2.8 -2.8 -6 -5.6
-4
-8
-5.0 -8.5
-6 -6.1 -10 -9.5
-8 -12
Bernanke’s Taper Talk Yellen’s Taper Powell’s Taper Talk Bernanke’s Taper Talk Yellen’s Taper Powell’s Taper Talk
(May 22, 2013–Dec 18, 2013) (Dec 19, 2013–Oct 14) (Dec 16, 2020–current) (May 22, 2013–Dec 18, 2013) (Dec 19, 2013–Oct 14) (Dec 16, 2020–current)
■ EMBIG Dividend Index ■ Investment grade ■ High-yield ■ GBI-EM BD Index ■ FX return ■ Local return
Sources: Bloomberg, JP Morgan, FT Fixed Income Research. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
Past performance is not an indicator or a guarantee of future results.
In December 2020, the Fed opened the door for a restart of tapering following the
extraordinary quantitative easing (QE) displayed during the pandemic. In its November 2021
statement, the FOMC announced it intended to move ahead with tapering as soon as
mid-November 2021 and that it would conclude in mid-June 2022. This indicated a faster
pace of tapering than occurred under Yellen, when purchases were slowed over a 10-month
period. However, the monthly size of tapering signaled by the FOMC will prove smaller
than in 2014 and consist of a total of US$15 billion every month (US$10 billion in USTs
and US$5 billion in mortgage-backed securities). Fed policymakers have also said they
3 How vulnerable is emerging market debt to fed tapering in 2022?
won’t lift rates unless the economy reaches full employment and inflation looks on track
to stay above 2% for some time. On this note, the latest Summary of Economic Projections
showed that half of the FOMC participants in attendance forecasted an increase in the
federal funds rate in 2022.
With a Fed taper of asset purchases upon us, this paper seeks to examine several funda-
mental and technical features of EMs, with a view to ascertaining whether the experience of
the taper tantrum is likely to be repeated. Specifically, we explore key differences with
respect to external vulnerabilities, positioning and technicals within the asset class, global
growth conditions, corporate leverage, and the EM policy response.
EXTERNAL VULNERABILITIES ACROSS EMERGING MARKETS
The fundamental impact of Fed tapering on EMs is likely to be exhibited most notably in EM
balance of payments dynamics. A moderation in capital flows to EMs and EMD asset price
pressures remain key risks for the asset class, following the announcement of Fed tapering.
However, we would note several distinct differences in the shape of EM external accounts,
relative to back in 2013, that would suggest EMs have greater fundamental capacity now to
withstand an environment of reduced accommodation.
The first is the shape of current account balances, which have dramatically improved across
EMs relative to 2013 (as shown in Exhibits 5 and 6). This is significant as countries with
larger current account deficits are more reliant on external sources of financing and more
vulnerable to capital outflows, all other things being equal. A country facing the dual
scenario of a current account deficit and capital account outflows would typically need to
either draw down on its stock of external savings or seek to promote a balance of payment
adjustment via an increase in interest rates and/or a weakening of the exchange rate.
This in turn would typically result in negative local market EMD returns and spill overs to
EM CURRENT ACCOUNTS
Exhibit 5: EM current account balances (four-quarter rolling Exhibit 6: Fragile Five current account balances (% GDP)
sum, US$) As of October 31, 2021
December 2005–March 2021
US$ billions % GDP
300 0.0
-0.5
200 -0.6
-1.0
100
-1.5 -1.4
0 -2.0
-100 -2.5
-3.0
-200
-3.5
-300
-4.0 -4.0
-400 -4.5
2006 2008 2010 2012 2014 2016 2018 2020 2013 2020 2021F
HY EM* Commodity EM** EM ex-mainland China & Russia (USDbn)
Sources: Bloomberg, HSBC Global Research, as of September 30, 2021. *HY EM refers to a subset of EM countries with higher yields in local markets, namely Brazil, India, Indonesia,
Mexico, South Africa and Turkey. **Commodity EM refers to a subset of EM commodity exporting countries, namely Brazil, Chile, Colombia, Indonesia, Malaysia, Peru, Russia and
South Africa. RHS source: IMF World Economic Outlook, April 2021. FT Fixed Income Research.
4 How vulnerable is emerging market debt to fed tapering in 2022?
HC EM returns. This was the very scenario faced most acutely by the ”Fragile Five”1
back in 2013, where current account deficits exacerbated the asset price impact of a
moderation in capital flows. Relative to back then, improved current account balances today
would suggest EMD is markedly less vulnerable to a scenario of tapering.
One argument that might contradict or weaken the above conclusion is that current
accounts have improved most dramatically because of the COVID-19 pandemic, and
therefore the improvements may be either short lived or offset by other pandemic-related
headwinds. It is prudent to acknowledge that a portion of the improvement in current
accounts has been linked to, potentially temporary, pandemic-related demand deterioration.
However, the IMF’s external balance assessment methodology2 suggests that much of
the reduction in current account deficits is linked to factors that impact current accounts
over longer periods, such as changes in productivity and a structural slowdown in GDP-
per-capita growth rates.
In addition to the reduced vulnerability suggested by the improvement in current accounts,
there is also evidence that EM countries have built greater external asset buffers that
could, at least temporarily, serve to fill any gaps created by taper-related capital outflows.
The IMF international investment position (IIP) statistics give us insight into the stock
and composition of a country’s external assets or liabilities. IIP data suggest that, compared
with 2013, the stock of liquid FX assets of companies and households across EMs has
risen significantly (see Exhibit 7). In the event that the 2021 Fed tapering leads to some
moderation in capital flows to EMs, we would expect this pool of liquid assets to provide
EM countries with more financing flexibility than back in 2013.
EMD: POSITIONING AND TECHNICALS
Having established that EMs likely have greater capacity today to withstand a scenario of
capital outflows, we also review technicals and positioning with a view to understand
the likelihood of such outflows, relative to 2013. Here, for simplicity, we specifically
EM: INTERNATIONAL % of GDP
INVESTMENT POSITION 10
Exhibit 7: Currency and 9
deposit assets of companies
and households 8
As of October 31, 2021 7
6
5
4
3
2
1
0
Czech Republic
Turkey
Mexico
Thailand
Peru
Poland
Russia
Indonesia
Hungary
Chile
Kazakhstan
Philippines
Brazil
South Korea
India
Colombia
■ Q1 2021 2012
Sources: Citi Research, FT Fixed Income Research.
5 How vulnerable is emerging market debt to fed tapering in 2022?
examine the likelihood of outflows from EMD as an asset class. EMD outflows not only put
direct negative pressure on EM bond prices, but they can also exert underlying fundamental
pressure by showing up as a portfolio/capital outflow on the balance of payments of indi-
vidual borrower countries.3
Leading up to the 2013 tapering, EMD had seen consistent inflows into the asset class
from the second quarter of 2009 onwards. The year 2012 saw a record year of inflows into
EMD amounting to US$100 billion (Exhibit 8), with HC inflows dominating LC inflows.
This, in part, led to a close to 20% total return for the key EM benchmark index4 during
2012, as spreads rallied from 400 bps to 250 bps. Valuations became very stretched
in late 2012 as yields reached an all-time low of 4.35% (yield to worst). This inflow trend
started to reverse in June 2013 following the start of US taper talk, with over half of the
2012 inflows leaving the EMD asset class in the subsequent 10 months. Here we observe
that the record pace of inflows in 2012 left the asset class in a more vulnerable technical
position in 2013 than it otherwise would have been in.
The technical situation today is vastly different. Although EMD has seen consistent inflows
since 2016, the more recent flow dynamic has been nowhere near as supportive as back in
2012. This is in part due to a period of stress in 2020, following the COVID outbreak,
where flows temporarily turned negative (~US$50 billion). While flows did rebound toward
the end of 2020, the net yearly inflow to the asset class was modest by historical stan-
dards. Coming out of a comparatively weaker flow period, we argue that the technicals in
2021 are much stronger than in 2013. Similarly, we assess valuations as being much less
stretched following the COVID-19-related asset price weakness of 2020.
Another technical feature that we think is supportive is the noticeable drop in the share of
foreign participation in EMD local-currency markets, relative to 2013. In every region
the share of foreign ownership of the local EMD market has fallen relative to 2013, with
CEEMEA (central and eastern Europe, Middle East, and Africa) experiencing the most
noticeable drop (–10%). (See Exhibit 9.) This, in some cases, has been driven by lower rates
(e.g., Poland and Hungary), while in others the main determinant is likely to have been
ASSET CLASS FLOWS AND FOREIGN PARTICIPATION IN EM LOCAL MARKETS
Exhibit 8: Retail and institutional strategic flows into EMD Exhibit 9: Share of foreign ownership of LC bonds
As of October 31, 2021 January 2013–August 2021
US$ billions Percent
120 40
100.1
100 35
80 30
60 25
49.9
40 20
23.3
20 15
0 10
-20 5
-40 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 Aug
’21
2012 2020 2021 CEEMEA LatAm AxJ EM
Sources: JP Morgan, Morgan Stanley, Haver, FT Fixed Income Research.
6 How vulnerable is emerging market debt to fed tapering in 2022?by increased volatility associated with political risk (e.g., Turkey). Foreign participation in
Asian bonds (excluding Japan) experienced the smallest drop, as significant inflows in
the onshore China bond market (~US$500 billion) (see Exhibit 10) over that period offset a
fall in most other markets.
Since 2013, EM sovereigns have tilted their issuance to the domestic market. And so, while
in most cases, the nominal holdings of foreigners have increased, local market participants
have started to play a much more dominant role. We’d expect this changed dynamic to
contribute to the relative resilience of EMD in times of external shock, given that local
market participants typically have longer time horizons and are less likely to respond to
shorter-term changes in global macro conditions.
We acknowledge, however, that there are some new technical risks to consider, relative to
2013, namely the increase in exchange-traded fund (ETF) ownership of the asset class.
Assets under management (AUM) in EMD ETFs is around US$100 billion and represents
roughly 15% of total EMD AUM (Exhibit 11). At the start of 2013, ETFs represented only
5% of total AUM (or US$19 billion). The relative increase in ETF ownership within the
asset class could exacerbate market volatility around the taper, in part because holders of
ETFs tend to be shorter term and less structural in nature. ETFs also tend to have more
concentrated positioning relative to underlying benchmark indexes, and therefore large
flows, particularly at times of underlying market weakness, can cause excessive volatility in
bond prices. We note that despite the outlook for less accommodative developed market
monetary policy, ETFs have seen inflows year-to-date.
GLOBAL GROWTH CONDITIONS
Typically, the best performance environments for EMD occur when global growth is strong
and synchronized, where EM growth is outpacing DM growth, and where global liquidity
conditions are loose. With the latter set to deteriorate as the Fed tapers asset purchases,
we examine the environment for global and EM growth and compare this to the situation
in 2013.
FOREIGN PARTICIPATION IN CHINA LOCAL BOND MARKETS AND GROWING ETF PRESENCE IN THE ASSET CLASS
Exhibit 10: Foreign ownership of China bonds (% of total) Exhibit 11: EMD ETF AUM (in US$ and % of AUM)
September 2014–August 2021 January 2010–October 2021
Percent US$ billion Percent
12 600 18
16
10 500
14
8 400 12
10
6 300
8
4 200 6
4
2 100
2
0 0 0
Sep May Jan Sep May Jan Sep May Jan Sep Aug Jan Mar May Jul Sep Nov Jan Mar May Jul Oct
’14 ’15 ’16 ’16 ’17 ’18 ’18 ’19 ’20 ’20 ’21 ’10 ’11 ’12 ’13 ’14 ’15 ’17 ’18 ’19 ’20 ’21
CGBs PBBs ETF AUM Non-ETF AUM ETF as % of total AUM (right)
Sources: JP Morgan, Morgan Stanley, CEIC, FT Fixed Income Research. CGB: China Government Bonds, PBB: Policy Bank Bonds.
7 How vulnerable is emerging market debt to fed tapering in 2022?The short- and medium-term global growth forecasts do not differ significantly in 2021,
relative to what was the case in 2013. There are, however, some key differences to note
that would suggest the growth environment is modestly less favorable for EMs in 2021.
The first is that global growth, albeit still above trend, is projected to be on a decelerating
path into next year. This stands in contrast to the outlook in 2013, where it was forecast to
accelerate. Another key difference is that DM growth is much stronger this time around,
with forecasted growth rates as high as 5.2% and 4.5% for 2021 and 2022, respectively,
according to the IMF.
This has two implications. It necessarily suggests a weaker relative EM/DM growth differen-
tial, even if EM growth does continue to outpace DM growth. Most importantly, though,
it means that there may be more scope, or need, for the Fed to undertake a more rapid
pace of tapering in 2021–2022 compared to that seen in 2013. Any surprise pick-up in the
pace of tapering would likely have a negative spillover to EM asset prices.
Today, the global recovery from 2020 continues, but momentum is weakening. The Delta
variant of COVID-19, global supply-chain disruptions and elevated energy prices are causing
growth to decelerate across advanced and developing countries. Aggregate output in
EMs is likely to remain well below pre-pandemic levels in part due to the slower rollout of
vaccines and also in part due to the lack of fiscal policy support that has been enjoyed
in the developed world. One other notable difference is the current medium-term projection
for China growth, which is expected to decelerate. We’ve already seen evidence of this
slowdown show up in third-quarter 2021 data. China’s growth path has important implica-
tions for the trajectory of EM growth more generally, given the importance of China as an
EM export destination.
As it happens, the taper in both 2013 and now in 2021 is coinciding with a period of
tighter financial conditions in China. Most recently, this has reflected a deliberate strategy
by the People’s Bank of China (PBOC) to bring down overall leverage in the system.
In 2013, the PBOC acted to rein in lending to the shadow banking sector, though credit
growth in China was twice that of GDP growth at the time, and so the PBOC remained
relatively supportive. For context, in September 2021, the year-over-year growth of
China’s money supply (M2) was 8.2%, which is roughly equivalent to the overall GDP
growth rate expected for 2021. The PBOC is unlikely to loosen its stance on liquidity, which
will contribute to a continued slowdown in China, which is likely to have implications for
EM growth.
2013 taper % year-on-year 2013 2014 2015
GLOBAL GROWTH CONDITIONS
Exhibit 12: IMF global World 3.3 4.0 4.5
growth forecasts Developed markets 1.2 2.2 2.5
As of October 31, 2021 Emerging market and developing economies 5.3 5.7 6.2
China 8.0 8.2 8.5
2021 taper % year-on-year 2021 2022 2026
World 5.9 4.9 3.3
Developed markets 5.2 4.5 1.6
Emerging market and developing economies 6.4 5.1 5.3
China 8.0 5.6 4.9
Sources: IMF WEO (April 2013, October 2021), FT Fixed Income Research. There is no assurance that any estimate, forecast or projection
will be realized.
8 How vulnerable is emerging market debt to fed tapering in 2022?CORPORATE LEVERAGE
It’s broadly accepted that the looseness of global financial conditions in the post-QE era
has spilled over to EMs, easing borrowing conditions in the developing world. One potential
pitfall of easier borrowing conditions is a build-up of corporate leverage that could, in
theory, undermine financial stability when policy conditions tighten. With Fed tapering in
action, we examine corporate leverage dynamics across the EM universe to understand
whether financial stability concerns are justified.
Contrary to what many might think, data show that corporate net leverage (i.e., net debt to
earnings before interest, taxes, depreciation and amortization) has not increased since the
2013 taper tantrum but is instead stable at worst, and has probably fallen over this period.
Net leverage for the sector did spike due to the impact of COVID-19 due primarily to weaker
earnings, but it has subsequently moderated. Net leverage for the sector is estimated at
1.6x,5 with IG at 1.3x and HY at 2.3x. Using the same measure, net leverage in 2013 was
higher at 1.8x.
Such a deleveraging trend might well be considered at odds with the growth of EM corporate
bond indexes. On closer inspection, however, the compound annual growth rate of the
face value of the EM corporate bond (CB) index6 in the eight years between 2013 and
2021E has been 6.6%. This is not excessive compared to nominal GDP growth across EMs
(see Exhibit 13). Another likely reason that the growth in EM corporate indices may
overstate growth in leverage, is that indices do not consider movements in bank lending.
As EM corporates become more sophisticated, they naturally look to diversify funding
sources away from local banking markets to take advantage of the size and tenor on offer in
the US bond market.
While the average net leverage multiple of the EM corporate sector has moderated, we
recognize that pockets of increased vulnerability do exist. China’s high-yield property
market is a clear example of this—and potentially also an example of how stress in a sector
can impact growth, commodity prices and capital flows. More broadly, the moderation
GROWTH IN EM CORPORATE INDEXES AND CHANGES IN EM CORPORATE LEVERAGE
Exhibit 13: Growth in EM corporate bonds (EMCB) broadly Exhibit 14: EM corporate leverage (multiples)
tracks EM GDP 2008–2021
2000–2021E
US $millions US $billions Leverage
1,800,000 40,000 4.0
1,600,000 35,000 3.5
1,400,000 3.0
30,000
1,200,000
25,000 2.5
1,000,000
20,000 2.0
800,000
15,000 1.5
600,000
10,000 1.0
400,000
200,000 5,000 0.5
0 0 0.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
EMCB (face value $M—left) EM GDP (IMF, current prices, $BN—right) ■ Net leverage (x) ■ Gross leverage (x)
Sources: IMF, ICE indexes, JPM, FT Fixed Income Research. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses and sales charges.
Past performance is not an indicator or a guarantee of future results.
9 How vulnerable is emerging market debt to fed tapering in 2022?of EM leverage in the commodities sectors (e.g., energy, metals, and mining) provides some
comfort that the second order effects of a slowdown in China’s growth rate should be
absorbed without a raft of defaults.
THE EM POLICY RESPONSE
While a tightening of DM monetary policy is clearly beyond the control of EM policymakers,
their response to the changing external environment has notable impacts on EM asset
prices. In this final section, we examine how monetary policy settings in 2021 compared to
2013, with a view to ascertaining if policy is likely to better support asset prices in the
current period of tapering. We find significant differences between the two periods,
with a far more prudent EM monetary response in 2021 likely to provide relative support to
EM asset prices.
We first review monetary policy settings preceding the 2013 taper tantrum. Of note, the
initial EM monetary policy response to the early stages of the 2008 global financial crisis
had some parallels to the later response to COVID-19. In both periods, monetary policy
rates declined sharply to reach record low levels as central banks provided pro-cyclical
support to economies.
Using a proxy for EM monetary policy based on the weighted average of the JPMorgan
GBI-EM Global Index constituent country policy rates,7 there appear to have been three
clear phases of policy adjustment between the announcement of the Fed’s first QE
in November 2008 and the infamous speech by Chairman Bernanke in May 2013 (see
Exhibit 15). The first phase lasted up to the end of 2009, with EM central banks
delivering decisive monetary easing to support economies until early 2010. Thereafter, they
tightened policy as growth rebounded strongly. Finally, in the period from mid-2011
to April 2013, policy rates were loosened again, in conjunction with the third installment of
QE by the Fed. Out of 16 central banks that had a single observable policy rate, 13
loosened the policy rate and three remained unchanged over that period. This effectively
meant that approaching May of 2013, most EM central banks had an easing bias.
Period Total* Change in weighted Countries that eased Countries with Countries that tightened
MONETARY POLICY AHEAD OF average policy monetary policy unchanged policy monetary policy
THE 2013 TAPER TANTRUM
Nov 2008–Dec 2009 16 –350bps 16 — —
Exhibit 15: Changes in
Dec 2009–Jun 2011 16 +150bps — 7 9
policy rates
Jun 2011–Apr 2013 16 –100bps 13 3 —
Sources: Bloomberg, FT Fixed Income Research. *Total EM Central Banks with Single Key Policy Rate Framework.
In our assessment, this last phase of EM policy easing was designed in part to deter, or at
least not attract, foreign portfolio inflows which had grown extensively in the run up to
May 2013. Over this period, dubbed as the “currency wars,” EM central banks also used
other measures to prevent foreign capital from dominating local markets. Examples
included Brazil and Uruguay, where taxes and unremunerated deposits were introduced for
foreigners. Elsewhere, a more unorthodox policy mix was introduced in Turkey to
attempt to adjust local financial conditions without increasing the attractiveness of its
market as a destination for foreign capital.
With the benefit of hindsight, as the impact of the taper talk in May 2013 unfolded it is
surprising to see that the average EM monetary policy rate didn’t change significantly
through to the end of 2013. While rates did increase in 2014, individual outcomes were
mixed, with many peripheral eurozone countries moving to cut rates aggressively. However,
10 How vulnerable is emerging market debt to fed tapering in 2022?the more externally challenged countries, such as the Fragile Five, were forced to tighten
policy to address the shock. As shown in Exhibit 17, the average policy rate increase
between May 2013 and December 2014 for the Fragile Five countries was more than 200
bps. Similarly, many alternative policies, such as foreigner transaction taxes in Brazil,
were abandoned in an attempt to attract incremental capital.
EM MONETARY POLICY RATES
Exhibit 16: Weighted average EM monetary policy rate* Exhibit 17: Change in policy interest rates
December 2007–October 2021 May 2013–December 2014
Percent Percent
10 10
9
Fed completes tapering 8
8 Fed announces tapering
7 6
6
4
5
3.84 2
4
Ben Bernanke alludes to tapering
3 in Congressional testimony 0
2 Powell alludes to tapering in 2021
-2
1
0 -4
Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Oct
Czech Republic
Thailand
Poland
Peru
Russia**
Indonesia
Malaysia
Mexico
Chile
India†
Turkey
Philippines
South Africa
Hungary
Brazil
Colombia
Romania
’07 ’09 ’10 ’11 ’12 ’14 ’15 ’16 ’17 ’19 ’20 ’21
Sources: Bloomberg, FT Fixed Income Research. *Based on GBI EM global rates. **Russia response to Crimea/ sanctions. †India not a GBI EM Global constituent country.
In summary, when we compare monetary policy in the post-crisis, pre-tapering periods,
there are distinct differences between the periods leading up to the 2013 and 2021 tapers.
In 2021, the majority of EM central banks simultaneously tightened policy in advance of
the announcement of the taper of Fed asset purchases. Conversely, in 2013, monetary policy
tightening by EM central banks trailed the taper announcement and market reaction.
Year-to-date in 2021, the weighted average policy rate for the JPM GBI-EM Global countries
using a single policy rate as the main policy tool has risen by 125 bps. In our assessment,
proactive EM central bank policymaking, along with the factors discussed above, will
make a repeat of the 2013 taper tantrum far less likely.
CONTRIBUTORS
Nicholas Hardingham, Stephanie Ouwendijk, CFA Robert Nelson, CFA Joanna Woods, CFA Carlos Ortiz
CFA Portfolio Manager, Portfolio Manager, Portfolio Manager, Research Analyst
Portfolio Manager Research Analyst Research Analyst Research Analyst Franklin Templeton
Franklin Templeton Franklin Templeton Franklin Templeton Franklin Templeton Fixed Income
Fixed Income Fixed Income Fixed Income Fixed Income
11 How vulnerable is emerging market debt to fed tapering in 2022?Endnotes
1. The following five countries were coined the Fragile Five: Turkey, Brazil, India, South Africa and Indonesia.
2. Source: IMF External Balance Assessment (EBA): Data and Estimates, 2019.
3. In cases where there is net selling by non-resident holders of debt, this will show up as a portfolio outflow (type of capital outflow) on the balance of payments of the underlying
borrower country.
4. Data refers to JPMorgan EMBI Global Diversified Index.
5. Last 12 months, using most recent data.
6. Based on the ICE BofA Emerging Markets Corporate Plus Index.
7. This was calculated as the weighted average for the countries within the JPMorgan GBI-EM Global Index, which had implemented a single key interest-rate policy framework
at the time.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up,
and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of
interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the
portfolio may decline. Special risks are associated with investing in foreign securities, including risks associated with
political and economic developments, trading practices, availability of information, limited markets and currency
exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same
factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign
securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay
interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions,
industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments
in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or invest-
ments. China may be subject to considerable degrees of economic, political and social instability. Investments in
securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and
economic risks.
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not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide
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