Dashboard of emerging market vulnerabilities to global rate hikes

A man looks at a screen displaying budget information, on a facade of the Bombay Stock Exchange (BSE) building in Mumbai, India, February 1, 2022. REUTERS/Francis Mascarenhas

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Feb 4 (Reuters) – The poorest “emerging market” countries are facing a headwind from rising global interest rates this year, which has in the past prompted international investors and their capital to raise capital. anchor and get away.

The problem is that when major developed economies like the United States raise rates, the returns on investments such as government and corporate bonds and the higher interest rates offered by developing countries no longer seem worth the extra risk.

And financial markets now expect U.S. interest rates — which tend to drive up borrowing costs in emerging markets — to rise fivefold this year and some Wall Street analysts even predict sevenfold.

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The last time this happened in such a short window was August 2005 to June 2006. The 10-year Treasury yield is now at 1.85% from just over 1.5% at the start of the month. year, pushing emerging market rates higher. The average cost for an emerging market government to borrow in its own currency is now nearly 6%. (.JGEGDCM) learn more

Emerging market sovereign bond yields

The International Monetary Fund was keen to warn developing economies to prepare for possible turbulence if US rates rise rapidly and/or the coronavirus pandemic worsens again.

It also indicates that those facing strong inflationary pressures or weak institutions should be prepared to let their currencies fall and raise their own interest rates.

The Brazilian real, the Colombian peso and, in Eastern Europe, the Czech koruna and the Hungarian forint, have all risen this year as their central banks raised interest rates.

Reuters Charts

These charts show some of the other measures that traditionally make a developing country vulnerable to rising global interest rates.

1/ DEFICIT NUMBER 1

Colombia, Chile and Egypt have the largest current account deficits as a percentage of their gross domestic product (GDP), according to data from Oxford Economics, making them more likely to borrow money to pay their bills. imports.

Reuters Charts

2/ DEFICIT NUMBER 2

Colombia, South Africa and Thailand have the biggest budget deficits, which means they need to borrow more to make up the shortfall.

Reuters Charts

3/ ORIGINAL FISHERMEN

Qatar, the United Arab Emirates and Hungary have higher levels of debt in dollars and other “hard currencies”, representing more than 80% of their GDP. Borrowing in another country’s currency is described by economists as the “original sin” because a falling local currency can make it very costly to pay off that debt very quickly.

Reuters Charts

4/ RESERVE STOP

Argentina, Qatar, and Egypt are among the countries with the lowest stocks of foreign exchange reserves that can be used to bolster national currencies and pay for goods, if needed.

Reuters Charts

5/ PAINFUL PAYMENTS

Sri Lanka spends far more than it brings in in taxes and other revenues just by paying the interest on its debt, let alone the underlying amount. Ghana uses 44% of its income while Egypt, Pakistan and Kenya use 30% to 40%.

Reuters Charts

6/ BECOME TRUE

In real effective exchange rate (REER) terms, the Brazilian real and Colombian peso are currently trading at more than 20% discount to their 10-year averages, according to data from the Bank for International Settlements. On the other hand, the REER of the Czech crown is increased by 10%.

Reuters Charts

The REER is calculated on a trade-weighted basis against a basket of currencies and adjusted for inflation.

Economists say that higher and lower REERs are misalignments and that both carry associated risks.

In the case of higher REERs, the risk could be economic overheating, excess and unhedged borrowing and excess capital inflows, DBS analysts say. With lower REERs, the risk would include high imported inflation, loss of purchasing power and difficulties servicing external debt.

Reuters Charts
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Reporting by Gaurav Dogra and Patturaja Murugaboopathy Editing by Marc Jones and Elaine Hardcastle

Our standards: The Thomson Reuters Trust Principles.

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