Kristalina Georgieva, the managing director of the International Monetary Fund, recently highlighted in an interview with CNBC the pronounced impact of high U.S. interest rates on emerging markets, contrasting with the relatively stable conditions in advanced economies like Europe and Japan. According to Georgieva,
...while Europe may not feel severe effects, emerging markets face significant challenges due to their higher exposure to U.S. financial conditions."
The benchmark interest rates in advanced economies have surged as central banks combat the post-lockdown and excessive money printing induced inflation, with intentions to scale back as economic conditions normalize. However, these high rates in the U.S. can lead to more expensive dollar-denominated debts for emerging markets, potentially sparking capital outflows as investors seek better returns in the U.S., thus tightening financial conditions globally.
“It is a much more serious issue for countries where the impacts of high interest rates in the United States are more profound — in many emerging market economies... We also see some of this in Japan, and there the attention of policymakers, indeed, has to be sharpened to carefully monitor where the volatilities are becoming more significant. In Europe, this is not the case.” Georgieva told CNBC’s Silvia Amaro in Brussels on Monday.
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Emerging markets are particularly vulnerable to these shifts. High U.S. rates can exacerbate economic instability by making borrowing more expensive and reducing the attractiveness of local assets. This scenario often leads to reduced investments and slower economic growth in these regions. Additionally, the IMF notes a sharp decline in the payoff rates of office loans converted into securities from over 90% in 2021 to just 35% last year, underscoring the broad financial strains.
Emerging markets have, however, shown resilience. Many have improved their policy frameworks, increased currency reserves, and enhanced debt structures to mitigate external shocks. Despite these improvements, the IMF warns of potential dangers as global interest rates remain volatile and financial conditions tighten. The projected path for U.S. interest rates suggests a peak soon, with potential cuts anticipated by mid-2024, which could provide some relief.
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