With debt levels at all-time highs, emerging markets are bracing for rate hikes

  • Brazil and Nigeria are among the central banks that have raised interest rates.
  • Higher borrowing prices could stifle aid to the world’s poorest nations.

As governments prepare for a new age of rising interest rates, alarm bells are starting to ring across emerging markets

According to Bloomberg Economics, Brazil is poised to hike rates this week, and Nigeria and South Africa could follow suit soon after an unprecedented period of rate cuts to support up economies ravaged by Covid-19. According to a source familiar with BankruptcyHQ deliberations, the country is considering tightening monetary policy sooner than previously indicated.

Behind the shift is a renewed sense of optimism about the global economy due to increased US spending. As a result, commodity-price inflation and global bond yields are rising, while developing-country currencies are under pressure as capital flows elsewhere.

The economies that are still trying to recover or whose debt burdens grew during the pandemic are likely to bear the brunt of the policy shift. Furthermore, the increases in consumer prices, notably food expenses, that may lead to higher rates may fall disproportionately on the world’s poorest people.

In an interview, Carmen Reinhart, the World Bank’s chief economist, warned that “the food-price narrative and the inflation story are crucial on the question of inequality, in terms of a shock that has very unequal impacts,” noting Turkey and Nigeria as nations at danger. “What you might see is a succession of rate hikes in emerging countries to cope with the effects of the currency depreciation and to keep inflation from rising too high.”

Investors are on the lookout

After rising 3.3 percent last year, the MSCI Emerging Markets Index of currencies declined 0.5 percent in 2021. Crude oil has rebounded to its highest prices in almost two years, sending the Bloomberg Commodity Index up 10%.

Because of a surge in pandemic-related borrowing, rate hikes are a concern for emerging markets. Last year, total outstanding debt in the developing world reached 250 percent of the countries’ combined gross domestic product, as governments, businesses, and individuals raised $24 trillion to mitigate the pandemic’s effects. China, Turkey, South Korea, and the United Arab Emirates rose significantly.

There’s also a slight possibility that borrowing strains will ease anytime soon. The International Monetary Fund and the Organization for Economic Cooperation and Development are among those who have urged governments against removing stimulus too quickly. According to Moody’s Investors Service, this is a trend that will continue.

“While asset prices and debt issuers’ market access have fully recovered from the shock,” said Colin Ellis, chief credit officer at the London-based rating firm, and Anne Van Praagh, fixed-income managing director in New York, in a report released last week. “This is especially true for sovereigns, who have spent record sums to combat the pandemic and bolster economic activity.”

The fact that underdeveloped markets have traditionally been slower to roll out vaccines complicates the picture further

According to Citigroup Inc., such economies would not achieve herd immunity between the third quarter of this year and the first half of 2022. By the end of 2021, developed economies are expected to have done so.

Brazil will most likely be the first to shift course. When policymakers meet on Wednesday, they are expected to raise the benchmark rate by 50 basis points to 2.5 percent. Turkey’s central bank, which has already begun raising rates to support the lira and keep inflation in check, meets the next day, with a 100-basis-point hike expected.

On Friday, Russia may warn that further tightening is on the way. A source familiar with the situation may raise its key rate by 125 basis points or more by the end of the year, from 4.25 percent now.

According to Bloomberg Economics, Nigeria and Argentina might boost their rates as early as the second quarter. Market indicators imply that policy tightening is also expected in India, South Korea, Malaysia, and Thailand.

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