Bloomberg
Emerging markets support debt rate hikes at Records
(Bloomberg) – Alarm bells are ringing over emerging markets as countries support a new era of rising interest rates. After an unprecedented period of interest rate cuts to push up the economies shattered by Covid-19, Brazil is expected to raise rates. week and Nigeria and South Africa may soon follow, according to Bloomberg Economics. Russia has already stopped slackening earlier than expected, and Indonesia could do the same. Behind the shift: Renewed optimism in the outlook for the world economy amid a larger US stimulus. It raises the prices of commodity prices and the global yields of bonds, while the currencies of developing countries as capital heads are weighted elsewhere. The upheaval in policy is likely to cause the greatest pain to the economies that are still struggling to recover or whose debt burden is swelling. during the pandemic. Moreover, the rise in consumer prices, including food costs, which will result in higher tariffs, could be the biggest toll on the poorest in the world. “The food price story and the inflation story are important in the issue of inequality, in terms of a shock that has very unequal consequences,” World Bank chief economist Carmen Reinhart said in an interview, endangering Turkey and Nigeria as countries. named. “What you can see is a series of rate hikes in emerging markets that are trying to cope with the effects of the currency shift, and curb upward inflation.” The MSCI Emerging Markets Currency Index fell 0.5% in 2021 after rising 3.3% last year. The Bloomberg Commodity Index rose 10%, with crude oil falling to its highest level in almost two years. Rate hikes are a problem for emerging markets due to a surge in pandemic-related lending. Total outstanding debt in the developing world rose to 250% of the countries’ combined gross domestic product last year, while governments, companies and households worldwide raised $ 24 billion to offset the effects of the pandemic. The largest increases were in China, Turkey, South Korea and the United Arab Emirates. What Bloomberg Economics says … ‘The tide is turning for central banks in the emerging market. Its timing is unfortunate – most emerging markets have not yet fully recovered from the pandemic recession. ”- Ziad Daoud, Chief Economist for Emerging Markets Click here for the full report And there is little chance that the loans will ease up very quickly. The Organization for Economic Co-operation and Development and the International Monetary Fund are among those who have warned governments not to remove stimuli too soon. According to Moody’s Investors Service, this is a dynamic that is here to stay. “Although asset prices and access to market devices have largely recovered from the shock, leverage statistics have changed more permanently,” said Colin Ellis, head of credit at the rating company in London. and Anne Van Praagh, fixed-income managing director in New York, wrote in a report last week. “This is particularly evident for sovereigns, some of whom have spent unprecedented amounts to fight the pandemic and sharpen economic activity.” The prospects for emerging markets are further complicated because they have usually delayed vaccines. Citigroup Inc. reckon such economies will not form herd immunity until a certain point between the end of the third quarter of this year and the first half of 2022. It is seen that the developed economies will do so by the end of 2021. probably Brazil. It is predicted that policymakers will increase the standard rate by 50 basis to 2.5% when they meet on Wednesday. The central bank of Turkey, which has already embarked on rate hikes to sharpen the lira and tame inflation, is meeting the next day with a 100 basis point shift in the charts. On Friday, Russia may indicate that the tightening is imminent. Nigeria and Argentina could increase their rates as soon as the second quarter, according to Bloomberg Economics. Market statistics show that expectations are also building up for policy tightening in India, South Korea, Malaysia and Thailand. “Given higher world rates and which are likely to strengthen core inflation next year, we are moving our forecasts for the normalization of monetary policy for most central banks forward. until 2022, from late 2022 or 2023 earlier, ”said Goldman Sachs Group Inc. analysts wrote in a report on Monday. “For RBI, the weakening of liquidity could turn into an upward cycle next year, given the faster recovery path and high and tough core inflation. ” Some countries may still be better able to withstand the storm than during the ‘tapered tantrum’ of 2013 when bets on the lowering of the US stimulus caused capital outflows and sudden fluctuations in foreign exchange markets. In emerging Asia, central banks have built up critical buffers, in part by adding $ 468 billion to last year’s foreign reserves, the most in eight years. Even higher rates will expose poorly positioned countries such as Brazil and South Africa to Sergi Lanau and Jonathan Fortun, economists at the Washington Institute for International Finance, stabilized the debt they have accumulated over the past year, the said in a report last week. is more limited, ”they wrote. “Higher interest rates will significantly reduce the fiscal space. Only growing Asian emerging markets can have primary deficits and still stabilize debt. ” Among those most at risk are markets that are still heavily dependent on foreign currency debt, such as Turkey, Kenya and Tunisia, William Jackson being major emerging markets. economist from Capital Economics in London, said in a report. Yet yields of sovereign bonds in local currencies have risen, hurting Latin American economies the most, he said. Other emerging markets may be forced to postpone their own fiscal measures following the passage of the US $ 1.9 billion stimulus plan, a danger that Nomura Holdings underlines. Inc. more than a month ago. “Governments may be tempted to follow Janet Yellen’s call to trade big on fiscal policy this year, to continue with large or even larger fiscal deficits,” said Rob Subbaraman, head of global market research at Nomura. in Singapore, wrote in a recent report. “However, that would be a dangerous strategy.” The net interest burden of emerging market governments is more than three times that of their peers in the developed market, while emerging markets are more inflation-sensitive and dependent on external financing, he said. In addition to South Africa, Nomura highlighted Egypt, Pakistan and India as markets where net interest payments on government debt increased from 2011 to 2020 as a share of production. (Updates with analyst comments in paragraph to Read More window, updates provide data in graph.) For more articles like this, please visit us at bloomberg.com. Sign up now to stay ahead of the most trusted business resource. © 2021 Bloomberg LP