Impact of Interest Rates on Emerging Markets | Analyze This!
Impact of Interest Rates on Emerging Markets | Analyze This!
Interest rates in advanced economies have increased at the fastest pace in 20 years and that’s made some emerging markets especially vulnerable. Watch our new Analyze This to learn why.
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0.066 -> Interest rates in
0.967 -> advanced economies have increased
at the fastest pace in 20 years,
5.005 -> and that has made some emerging market
economies especially vulnerable.
9.542 -> Let's look at why.
17.25 -> To start with, higher global
interest rates increased borrowing costs
20.653 -> and many emerging markets rely on external
financing for public spending.
25.025 -> So when interest rates go up, it
27.427 -> becomes more expensive for countries
to pay back their existing debt.
31.398 -> It also becomes harder for countries
to access
33.7 -> new financing and could even increase
the risk of default.
36.97 -> Rising interest rates
38.071 -> also make emerging markets
more vulnerable to capital outflows.
42.409 -> Since high interest rates
in advanced economies mean higher returns
45.211 -> there, investors typically move
capital away from emerging markets,
49.082 -> and that often entails
buying advanced economies’ currencies,
52.619 -> which reduces demand for currencies
in emerging markets, creating depreciation
56.489 -> and ultimately inflation pressure.
59.059 -> Now, in the face of these pressures,
how can emerging markets respond?
63.63 -> The standard short term policy response
is to increase domestic interest
67 -> rates, to incentivize investors
to keep their money in emerging markets.
71.004 -> But this isn't always optimal
because it could lead
73.807 -> to unnecessary economic contraction
or even create
76.843 -> financial stability risks,
especially if the increase is rapid.
81.047 -> That's why at the IMF, through our Integrated
Policy Framework, we advise
85.685 -> countries on how to use a set of tools
rather than just interest rates,
89.689 -> depending on each country's
economic characteristics
92.492 -> and the type of external pressures
it is facing.
95.662 -> For example, in some emerging markets,
98.031 -> foreign exchange markets
are relatively shallow, so the exchange
101.835 -> rate tends to be more sensitive
to large transactions.
105.572 -> If these countries experience sudden,
large capital outflows
109.008 -> due to the loss of investor appetite,
they can sell foreign exchange
112.712 -> domestically to offset the negative impact
on the exchange rate.
116.783 -> And when a crisis is imminent, restricting
capital outflows can be an option too.
122.789 -> These policies, however, cannot substitute
for a promising
125.992 -> and stable growth model and prudent
fiscal policy.
130.096 -> So given the recent rise in interest rates
all over the world,
134.267 -> what has been the effect
on emerging markets?
137.57 -> Countries with stronger growth prospects
for inflation, larger reserves
142.575 -> have weathered the rapid rise in global
interest rates relatively well.
146.779 -> And because markets don't expect
interest rates to rise much further,
150.717 -> emerging economies
151.651 -> are already becoming more attractive
for international investors.
155.889 -> At the end of the day, though,
it will depend
158.057 -> on actual monetary policy
in advanced economies.
161.194 -> And that's why
clear guidance from their central bank
163.997 -> is key to avoiding
financial disruption to emerging markets.
Source: https://www.youtube.com/watch?v=QjO2Gle1Xnw