The US Federal Reserve has raised interest rates six times since Donald Trump became president in January 2017.
With the target range for the benchmark policy rate now at 2% to 2.25% - still low by historic standards - Fed officials have pencilled in another move this year, likely in December, and three more hikes in 2019.
For sure, policymakers across emerging markets (EMs), already rattled by an exodus of capital and tumbling currencies, are bracing for a protracted struggle in the face of rising US interest rates and a deepening trade war between the world’s two biggest economies.
The Fed’s tightening has caused strains across EMs, most notably in Argentina, Turkey and Indonesia as capital flows reverse. Officials from developing economies used the International Monetary Fund-World Bank meetings in Bali, Indonesia to call for awareness of the strains they face as the crisis-era monetary reforms across the developed world come to a close.
The prospect of a deepening rout in EMs was underscored last week with the IMF cutting its outlook for world growth for the first time since 2016.
EMs have for long been at pains to contain the financial turmoil that struck them amid the Fed focus on tightening financial conditions.
Total EM borrowing increased from $21tn (or 145% of GDP) in 2007 to $63tn (210% of GDP) in 2017. Since 2007, the foreign-currency debt – in dollars, euros and yen – of these countries doubled to around $9tn.
In all, EM borrowers need to repay or refinance around $1.5tn in debt in 2019 and again in 2020. Many are not earning enough to meet these commitments.
Optimists, however, argue that most EMs are far less vulnerable than they were in 1997. Foreign currency holdings among EMs and developing economies are projected to be $144bn higher this year, according to the International Monetary Fund.
EM policymakers are also reacting better than in the past. Argentina’s move to defend the peso by hiking its key interest rate and committing to reducing its fiscal deficit exemplifies that.
The Fed is taking into account the effects its policies have on EMs, vice chairman for Supervision, Randal Quarles said in Bali, Indonesia, responding to criticism that higher US rates are having an unsettling effect.
“We do consider the implication of our own policy to emerging markets,” said Quarles. “The right response is for us to be as predictable, gradual about our policy as we can.”
Hikes to US interest rates, trade protectionism, higher oil prices and China’s slowing growth are among the many headwinds facing EMs. But there is no “one-size-fits-all” solution to the country-specific fallout from rising US interest rates and a stronger dollar.
The issues facing EMs are seen persisting for another 18 months or more.
There’s no “magic bullet” for how emerging economies can respond to the volatility that’s shaking them. Governments, instead, need to look inwards, get the basics right and like building buffers and bolstering underlying fundamentals.
Sure, EMs still aren’t masters of their own destiny, but it’s high time they stopped looking over their shoulders at the Big Brother.
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