India and Philippines most vulnerable to repeat of taper tantrum of 2013: S&P

India and the Philippines were the most vulnerable to a repeat of the taper tantrum of 2013 as reflation trades were lifting US bond yields, according to global rating agency S&P.

Rising inflation in recent months and below average real policy rates could imply quicker capital flight, prompting central banks in the two economies to hike rates, it said in a report on Wednesday.

On the other hand, stronger than normal current account levels acted as a mitigating factor to these risks, S&P said.


The taper tantrum of 2013 refers to the instance of a spike in US bond yields on account of the Federal Reserves’ (Fed) indication that it would begin unwinding its quantitative easing program.

The resulting panic over rising credit costs sparked sharp capital outflows from emerging markets, including Asia, forcing central banks to tighten liquidity conditions.

This time around, Asian markets on the whole were better cushioned to external shocks compared to 2013 due to current account surpluses, low inflation for the most part, higher real interest rates, and fatter foreign exchange reserve buffers, the report said.

“Even if capital outflows pick up, this lowers the odds that central banks will be forced into untimely measures that could strangle the recovery before it gathers steam,” it said.

Further, rising US bond yields are based on expectations of stronger economic growth and hence the upward pressure on inflation in the future, or the so-called ‘reflation trade’, as against an imminent policy shock, the agency said.

In the event that investors believe the Fed has erred in letting inflation get out of hand and price in an imminent rate hike, it could cause real yields to rise again, hitting Asian markets, it said.

As was the case in 2013, this could impact India the most as S&P counted it among the economies with the lowest buffers to external shocks since the current account could get back into deficit on account of normalising growth would increase external funding requirements.