×

Emerging markets can’t blame the Fed for capital outflows: Fitch

Emerging market (EM) economies shouldn't blame the U.S. Federal Reserve's monetary tightening for the increasing volume of outflows of capital in the hunt for higher interest rates, the director of Fitch Ratings' Asia division told CNBC.

"I think it's no surprise that in a world that is increasingly globalized that emerging markets are sensitive to monetary movements globally," Mervyn Tang, director of Asia-Pacific Sovereigns at Fitch Ratings, told CNBC on Wednesday.

"Now I think it's difficult to say it's the Fed's fault (if capital leaves emerging markets for a higher interest rate environment in the U.S.) because ultimately the Fed's policy is to manage price stability and its own economy."

Vehicles sit in traffic at a junction in Hanoi, Vietnam, on Tuesday, Jan. 26, 2016.
Maika Elan/Bloomberg via Getty Images
Vehicles sit in traffic at a junction in Hanoi, Vietnam, on Tuesday, Jan. 26, 2016.

"The best that emerging economies can do is to shore-up their public balance sheets to improve their external positions so they're not sensitive to the move of external parties," Tang said, speaking to CNBC at the Asian Development Bank annual meeting in Frankfurt.

Tang's comments come amid increasing worries over central bank moves and their effects on an increasingly globalized economy. When the U.S. Federal Reserve announced it was to being "tapering" its quantitative easing program in 2013, emerging markets -- to which investors had flocked when U.S. rates were low -- saw massive capital outflows and market selloffs as investors fled.


Now, as the Fed starts to slowly increase rates, many emerging markets feel powerless to prevent capital flight. Meanwhile other central banks are trying to combat very low inflation and, in the euro zone, deflation, by cutting interest rates to record lows.

On Tuesday, the Reserve Bank of Australia (RBA) was the latest in a line of banks jolting financial markets by cutting interest rates to a new record low in a bid to combat stubbornly low inflation. (103599464)

Tang said concerns over the rate cut were founded in worries over rising house prices in Australia which could be fuelled further with lower rates that encourage more house-buying.

"I think a lot of the people who are concerned about the impact of a rate cut are thinking about the housing market and credit growth more generally, and we've seen very sharp increase of house prices in places like Sydney and Melbourne, I think the concern is that if we keep lowering rates we're going to keep boosting these markets," he said.