“If easy financial conditions tighten more sharply than expected, EM debt would come under pressure,” said Monica Insoll, the head of the credit market research team at Fitch. “If investor appetite for EM risk reverses, issuers may face refinancing challenges even in their home markets, while capital outflows could put pressure on exchange rates or foreign exchange reserves.”
Capital flows to emerging markets
may diminish as US and global investors get higher yields on US assets.
This will add pressure on governments that already face the challenge of having to finance current-account deficits or refinance external debt, and could potentially lead to weaker currencies or a decline in foreign-exchange reserves, Fitch said.
The average yield on local-currency government debt in emerging markets
climbed this week to the highest level since March 2017, according to Bloomberg Barclays indexes. Apart from the most vulnerable large emerging markets, namely Ukraine, Turkey and Argentina, Fitch sees risks in higher-rated United Arab Emirates, Qatar, Peru and Kazakhstan due to their reliance on external debt.