Emerging economies need to take precautions against US rate hikes: IMF

The International Monetary Fund (IMF) said emerging economies around the world need to prepare for US rate hikes based on circumstances and vulnerabilities. The spillover effects of rate hikes are financial instability, currency depreciation, and rapid inflation.

With soaring prices, tight labor markets, and turmoil related to Omicron, the Federal Reserve has tightened monetary policy, accelerated declining asset purchases, and curbed high inflation in 1939.

“These changes make emerging market outlooks more uncertain. These countries are also facing rising inflation and significantly higher public debt,” the International Monetary Fund said in a blog. .. Position on Monday.

The average total government debt in emerging markets is increasing, saying, “By the end of 2021, we will reach an estimated 64% of GDP, which varies widely from country to country. However, in contrast to the United States, the recovery and labor markets in the United States It’s not that strong. “

The IMF has pointed out two scenarios. One is gradual tightening and rate hikes, which could have a “benign” impact on emerging markets. In this case, strengthening the US economy will maintain domestic demand, and emerging economies can offset adverse effects such as currency depreciation through increased trade.

A sharp increase in rates is the second scenario. In such a situation, the financial situation in the delicate economic zone will be shaken due to the severe global financial situation. Larger capital outflows compared to the depreciation of the US dollar and currencies will spiral down the economy.

As some countries have begun the process of coordinating monetary policy, the IMF recommends that financial institutions take prompt and comprehensive action in vulnerable countries. International lenders are proposing that countries allow their currencies to depreciate while raising benchmark rates.

These economic trade-offs include not supporting domestic markets such as local companies with credit lines. This helps tighten fiscal conditions, but it also weakens the economy.

Countries with high foreign currency debt need to work towards debt reduction, exposure hedging, and extended payback periods. In an economy where companies have large debts and bad debts, the IMF points out lenders facing the solvency problem.

Fiscal policies such as tax increases, more efficient public spending, and the implementation of structural fiscal reforms will help the economy survive such turmoil in the international market.

In addition to this, countries may rely on the IMF’s support, but lending amounts depend on how these economies strengthen their fiscal stance during these critical periods of economic turmoil.

Emerging markets include China, India, Indonesia, Malaysia, Philippines, Singapore, Thailand, Russia, Brazil, Mexico, Saudi Arabia, Nigeria and South Africa.

Naveen Athrappully


Naveen Athrappully is a news reporter covering business and global events in The Epoch Times.