WASHINGTON ( Associated Press) – When the Federal Reserve raised interest rates – as it did on Wednesday – The effect does not end with US homebuyers paying more for mortgages Or Main Street business owners facing costly bank loans.
The fallout can be felt beyond the borders of America, hitting shoppers in Sri Lanka, farmers in Mozambique and families in poor countries around the world. Effects abroad range from higher borrowing costs to depreciating currencies.
“It will put pressure on developing countries of all kinds,” said Eric Lecompte, executive director of Jubilee USA Network, a coalition of groups seeking to reduce global poverty.
International Monetary Fund Managing Director Kristalina Georgieva was very worried last month To warn the Fed and other rate-hike central banks to “be mindful of spillover risks to vulnerable emerging and developing economies.”
Citing harsh financial conditions, the IMF recently lowered the outlook for economic growth this year in developing and emerging market countries to 3.8%, a full percentage point lower than forecast in January.
The Fed on Wednesday raised its benchmark short-term rate by half a percentage point to its highest level since the pandemic hit two years ago, and indicated that more rate hikes would follow.
A hike in US rates could cause long-distance damage in a number of ways. First, they can slow the US economy and reduce the appetite of US consumers for foreign goods.
They also affect global investment: as rates rise in the US, safer US government and corporate bonds become more attractive to global investors. So they can withdraw money from poor and middle-income countries and invest it in the United States. Those changes raise the US dollar and push down currencies in developing countries.
Falling currencies can cause problems. They make it more expensive to pay for imported food and other products. This is particularly worrying at a time when supply chain constraints and the war in Ukraine have already disrupted shipments of grain and fertilizer and pushed up food prices. around the world to dangerous levels.
To protect their sinking currencies, central banks in developing countries can raise their rates; Some have already started. This can cause economic damage: It slows growth, wipes out jobs and squeezes business borrowers. It forces indebted governments to spend more of their budgets on interest payments and less on things like fighting COVID-19 and feeding the poor.
The IMF’s Georgieva has warned that 60% of low-income countries are already in or near a “debt crisis” – an alarming threshold reached when their debt payments become half the size of their national economies.
Despite the risks of collateral damage, the Fed is expected to raise rates several times this year to counter resurgent inflation in the United States.
Inflation growth is the result of an unexpectedly strong recovery from the 2020 pandemic slowdown, a rebound that took businesses by surprise and forced them to scramble to find workers and supplies to meet customer demand. This has resulted in shortages, delays in order filling and high prices. In March, US consumer prices rose 8.5% from a year earlier – the biggest jump since 1981.
By raising interest rates, the Fed is hoping to pull off a so-called soft landing — raising rates enough to slow the economy and bring inflation under control but not enough to tip the US economy into another recession.
Developing countries are concerned that the Fed waited too long to launch its anti-inflation campaign and will be forced to raise rates so aggressively that it causes a hard landing that will hit the United States and developing countries alike. damages from.
“They would have been much better off if the Fed had responded more quickly when the problem started,” said Liliana Rojas-Suarez, senior fellow at the Center for Global Development.
The Fed doesn’t have an impressive record of engineering soft landings. The last one came under Fed Chair Alan Greenspan in the mid-1990s, an episode that ended unfortunately for many developing countries.
“The US was able to manage inflation well and avoid a recession,” Rojas-Suarez said, “but at the same time created huge spillovers for emerging markets.” This was followed by a series of financial crises – in Mexico, in Russia, and eventually in much of Asia.
Robin Brooks, chief economist at the Institute of International Finance, noted that many emerging market countries are in a much stronger financial position than they were in 2013, or even in 2013, when the Fed cut its easy money policies. had planned to do so, from which the investment ran out. Developing world.
For one thing, many have increased their foreign exchange reserves, which central banks can use to buy and support their countries’ currencies or to meet foreign debt payments in crisis. For example, on the eve of the 1997–1998 Asian financial crisis, Thailand’s reserves amounted to 19% of its economy; They now stand at 47%, according to the Institute, a trade group for global banks.
Brooks also says rising raw material prices are “a bit unexpected” for commodity exporters such as oil producer Nigeria and soybean producer Brazil.
But some countries are in the grip of financial shocks. Among them are those that are heavily dependent on imported oil and other commodities and have less reserves than other countries. Rojas-Suarez’s list of financial risks is topped by Sri Lanka, which last month said it was suspending repayment of foreign debt while it works on a debt restructuring program with the IMF. Also shining red are Tunisia, Turkey and Mozambique.
Rising US interest rates are not always a disaster for developing countries. If they are climbing because the US economy is strong – and businesses and consumers seek credit to buy things – that means more opportunities for exporting countries to sell in the US market.
But the result is very different when the Fed is raising borrowing costs in a deliberate campaign to slow US growth and ease inflationary pressures from the economy.
Economists from the Fed and the Conservative American Enterprise Institute wrote in a paper last year, “If higher rates are driven primarily by concerns about inflation or a sharp turn in Fed policy … it could be more for emerging markets.” would be disruptive.”
Which, worryingly, is exactly what the Fed is doing now.
It is another blow to countries that are still reeling from huge debt, large numbers of unvaccinated people and rising food prices.
“It’s additional pressure,” LeCompte says, “and how much pressure can governments take?”