As tapering approaches, deficit countries that “promoted pro-FDI policies and successfully narrowed their current account deficits are likely to be less vulnerable,” says J.P. Morgan. From a financing viewpoint, every country likes foreign direct investments because they are less likely to leave when economic adversities hit, and every creditor feels more secure when the borrower is not too indebted.
The Brazilian real and the Indonesian rupiah are J.P. Morgan’s picks among developing world currencies that are most vulnerable to Fed tapering.
“The risk is [even] higher for expensive currencies. Both BRL and IDR are overvalued versus their 10 year average REER,” says the bank.
In November, the Brazilian Real and the Indonesian Rupiah were the worst EM currency performers, losing 4.2% and 4.1% respectively.