Goldman Sachs indicated that the monetary tightening in the United States has an impact on emerging markets (EMs) through different channels such as capital flows, current account balances, foreign currency reserves, and currency mismatch from borrowing in US dollars. It considered that capital flows to EMs are the most affected by tighter monetary policies, while the other channels have become less vulnerable because current accounts of EMs are more balanced than in previous tightening cycles, their foreign currency reserves are larger, and their currency mismatch risk from dollar debt is lower. It said that Chile and Argentina are the most affected countries from higher U.S. interest rates, given the high share of capital inflows to their respective GDP. It added that Argentina and Turkey, whose current account deficits are the widest across EMs, are the most exposed through the current account channel to higher U.S. interest rates. In parallel, it noted that higher foreign currency reserves improved the EM central banks' ability to stabilize their exchange rates when needed or to help local banks and non-financial firms hedge their exchange rate risk. In addition, it said that corporates that borrowed the most in U.S. dollars are commodity producers or other large exporters that are originally hedged against exchange rate risk by their dollar revenues or assets, which reduces their currency mismatch risks.
Source: Goldman Sachs