Levered EMs At Risk From Eventual Fed-Led Policy Tightening

Today's surprise UK CPI print in the UK, following close on the heels of last week's bumper US inflation report, has further intensified the debate around the nature of inflation (transitory or persistent). Regardless of how the inflation surge is being interpreted, central banks are facing increased pressure to respond.

• The likelihood of a shift towards policy tightening in the coming quarter poses a risk to EMs where foreign currency liabilities have been left exposed by insufficient reserves of hard currency.
• The chart below uses the latest comparable Q2 data for foreign currency liabilities from the World Bank and IMF reserve data for the end of Q3 (both normalised by GDP) to give a sense of funding pressures across the EM majors.
• While there are substantial FCY liabilities for the likes of Hungary, Uruguay and Chile, the maturity composition is heavily tilted towards the longer term debt and reserves are more than sufficient to cover near-term funding needs.
• Perhaps unsurprisingly, the most vulnerable on our list is Argentina and Turkey where there is a relatively small reserve buffer for liabilities falling due in the short term.