Bloomberg
Emerging markets are gearing up for record debt rate hikes
(Bloomberg) – Warning signs are beginning to sound in emerging markets as countries prepare for a new era of rising interest rates. After an unprecedented period of rate cuts to sustain the economies destroyed by Covid-19, Brazil is expected to raise rates. week and Nigeria and South Africa may follow soon, according to Bloomberg Economics. Russia has already stopped slowing ahead of expectations and Indonesia can do the same. Behind the change: Renewed optimism in the outlook for the world economy amid greater US stimulus. This is driving up commodity price inflation and global bond yields, while weighing on developing countries’ currencies as heads of capital elsewhere. The policy change is likely to inflict the greatest pain on economies that are still struggling to recover or whose debts increased during the pandemic. In addition, gains in consumer prices, including food costs, which will lead to higher rates may cause the greatest tribute to the world’s poorest. “The history of food prices and the history of inflation are important in the issue of inequality, in terms of shock that has very uneven effects,” Carmen Reinhart, chief economist at the World Bank, said in an interview, citing Turkey and Nigeria as countries at risk. “What you can see is a series of rate hikes in emerging markets, trying to deal with the effects of the currency drop and trying to limit rising inflation.” Investors are on guard. The MSCI Emerging Markets currency index fell 0.5% in 2021, after rising 3.3% last year. The Bloomberg Commodity Index jumped 10%, with crude oil rebounding to its highest levels in nearly two years. Rate hikes are a problem for emerging markets because of an increase in pandemic-related loans. Total debt across the developing world increased to 250% of countries’ combined gross domestic product last year, as governments, businesses and families raised $ 24 trillion worldwide to offset the consequences of the pandemic. The biggest increases occurred in China, Turkey, South Korea and the United Arab Emirates. What Bloomberg Economics says … “The tide is turning for emerging market central banks. The moment is unfortunate – most emerging markets have not yet fully recovered from the pandemic recession. ”- Ziad Daoud, chief economist for emerging markets Click here to read the full report And there is little chance of easing loan burdens anytime soon. The Organization for Economic Cooperation and Development and the International Monetary Fund are among those who have warned governments not to remove the stimulus anytime soon. Moody’s Investors Service says it is a dynamic that is here to stay. “Although asset prices and debt issuers’ market access have largely recovered from the shock, the leverage indicators have changed more permanently,” Colin Ellis, credit director for the rating firm in London, and Anne Van Praagh , managing director of fixed income in New York, wrote in a report last week. “This is particularly evident for sovereign governments, some of whom have spent unprecedented sums to fight the pandemic and strengthen economic activity.” To further complicate the outlook for emerging markets, they are often slow to launch vaccines. Citigroup Inc. estimates that such savings will not form herd immunity until some point between the end of the third quarter of this year and the first half of 2022. Developed economies will do so by the end of 2021. The first to change course is likely to be Brazil. Policy makers are expected to raise the benchmark rate by 50 basis points to 2.5% when they meet on Wednesday. Turkey’s central bank, which has already embarked on rate hikes to sustain the lira and control inflation, meets the next day, with a move of 100 basis points in the charts. On Friday, Russia may signal that the tightening is imminent. Nigeria and Argentina may increase their rates as early as the second quarter, according to Bloomberg Economics. Market metrics show that expectations are also growing for policy tightening in India, South Korea, Malaysia and Thailand. “Given the higher global rates and what is likely to set the core of inflation next year, we have advanced our projections of monetary policy normalization for most central banks by 2022, the end of 2022 or 2023 before,” wrote analysts at Goldman Sachs Group Inc. in a report on Monday. “For the RBI, the tightening of liquidity this year could turn into a bullish cycle next year, due to the faster recovery path and high and sticky core inflation.” Some countries may still be in a better position to withstand the storm than during the 2013 “tantrum” when bets on cuts in the US stimulus triggered capital outflows and sudden turns in the foreign exchange markets. In emerging Asia, central banks built critical reserves, in part adding $ 468 billion to their foreign reserves last year, the maximum in eight years. However, higher rates will expose countries, such as Brazil and South Africa, that are poorly positioned to stabilize the debt they accumulated last year, Sergi Lanau and Jonathan Fortun, economists at the Washington-based Institute of International Finance, said in a statement. report last week. “In relation to developed markets, the low rates of the quarter allow emerging markets to be more limited,” they wrote. “Higher interest rates would significantly reduce the fiscal space. Only high-growth Asian emerging markets would be able to run 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, head of emerging markets economist at Capital Economics in London, said in a report. However, yields on sovereign bonds in local currency have also risen, mainly hurting Latin American economies, he said. Other emerging markets may be forced to postpone their own fiscal measures after the US $ 1.9 trillion stimulus plan is approved, a danger stressed by Nomura Holdings Inc. more than a month ago. “Governments may be tempted to follow Janet Yellen’s call to act big this year on fiscal policy, to continue to run large or even bigger fiscal deficits,” Rob Subbaraman, Nomura’s head of global markets research in Singapore , wrote in a recent report. “However, this would be a dangerous strategy.” The net interest burden of emerging market governments is more than three times that of their developed market counterparts, while emerging markets are more prone to inflation and depend 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 the paragraph after the Read more box, graph yield data updates.) 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