Following article on CNBC: http://www.cnbc.com/2015/12/16/fed-interest-rate-hikes-impact-on-emerging-markets.html, explains it very well.
The U.S. Federal Reserve finally raised interest rates after a nine year gap, marking the end of one of the greatest monetary policy experiments of all time.
The Fed's actions have had a profound impact on financial markets not just in developed markets, but also in emerging markets (EMs).
How did the Fed's actions influence emerging markets?
As the Fed cut interest rates aggressively, investors seeking higher returns went in search of yield. The gush of foreign money lifted stocks and currencies from Manila to Mexico City.
The flood of capital also boosted lending and consumption, ensuring emerging markets grew at a healthier clip than their sclerotic peers in the developed world.
Fed raises interest rates, first time since 2006
What has changed?
The outlook has worsened though just as the Fed begins to turn off the spigot. Economic activity has slowed in many emerging markets, with commodities-linked countries particularly hit hard as China begins to slow. Foreign investors have yanked out billions from emerging markets.
Net capital flows for global emerging markets will be negative in 2015, the first time that has happened since 1988, the Institute of International Finance (IIF) said in an October report.
Net outflows for the year are projected at $541 billion, driven by a sustained slowdown in EM growth and uncertainty about China, it added.
How are emerging markets coping?
There are differences between emerging market countries on their ability to weather the impact of higher interest rates. Indonesia and Malaysia have suffered due to the slump in commodities, which have hurt export revenues.
The Indonesian rupiah and the Malaysian ringgit fell sharply in the summer, although they have recovered a little since. Still, the risk of renewed currency weakness amid anticipated dollar strength limits the possibility of additional stimulus somewhat.
The Philippines and India tend to depend more on domestic consumption so have fared better. Lower crude oil prices have helped narrow the current account deficit in India while inflation has also cooled, giving the central bank elbow room to cut interest rates.
The country has also upstaged China as the world's fastest growing major economy though the construction sector has slowed and bad debts in the banking system have risen.
In China, the stuttering economy and capital outflows have dragged the yuan down against the U.S. dollar to the lowest in more than four years. The People's Bank of China has intervened in the currency market to avert bigger falls.
China's foreign exchange reserves, the world's largest, have declined as a result but the country still has ample buffers to repay overseas creditors and honor import commitments compared with rivals. The Philippines also scores well on this metric.
South Korea benefits from one of the highest current account surpluses in the region but its highly open economy is vulnerable to foreign shocks. A big chunk of exports go to China, where a) the economy is slowing and b) companies in certain sectors are also substituting imports that would have typically come from Korea with locally-made products.
Lower crude prices have also hurt demand for the heavy machinery it exports and economic growth has been soft.