Emerging countries under threat of a hardening of Fed policy

Posted on Sep 3, 2021 at 7:33 am

Everyone would like to avoid it, but no one yet knows if it will be possible. The change of footing of the Federal Reserve during the speech of its President Jerome Powell in Jackson Hole last week poses a risk to the economies of emerging countries. The decline in the Fed’s asset buybacks, which should start by the end of the year, brings back bad memories. In 2013, when Ben Bernanke, then head of the Fed, suggested that US monetary policy could become less accommodating in the future, investors were seized with panic, mainly affecting the large emerging countries. . Long-term American interest rates had jumped, capital had left emerging countries for the United States, and problems had started for Brazil, Indonesia and Turkey. The cost of debt in dollars had increased, putting these countries in difficulty.

The IMF fears a repeat of 2013

It is a repetition of this scenario that the International Monetary Fund (IMF) fears today. Earlier this week, Gita Gopinath, the IMF’s chief economist, said she was “concerned about a scenario in which inflation would rise much more than expected, which would require a much faster normalization of monetary policy in the United States. “.

“If the cost of capital in dollars were to rise quickly, then it would be difficult for emerging countries, even for the strongest of them,” said Samy Chaar, chief economist at Lombard Odier. Whenever a crisis in emerging countries has occurred, it is because investors have misjudged the risks. With an additional uncertainty: vaccination is less advanced in emerging countries than in developed countries. The health risk therefore still exists.

Less marked imbalances

For Olivier de Boysson, economist at Société Générale, “emerging countries are less fragile today. The external deficits of the large emerging economies are smaller than in 2013 and the financing needs in dollars are also lower ”. This is primarily due to the Covid, which has reduced imports and therefore the need for financing. Then, “as growth in many emerging countries remains sluggish, capital needs are reduced,” said Sergi Lanau, economist at the Institute of International Finance (IIF) in Washington. In 2013, some countries had current account deficits representing 6% of their GDP. In 2021, the IMF expects deficits of less than 3% in the large emerging economies. The United States now has the largest deficit.

“Since the cold shower of 2013, emerging countries have developed their domestic debt market. They are less dependent on the greenback today and dollar reserves have rather increased in recent years, ”confirms Irina Topa-Serry, economist at AXA IM. Another important point, “in several emerging countries such as Brazil and Turkey, central bankers have already anticipated the tightening of US monetary policy and have increased their interest rates to continue to attract external financing,” adds Irina Topa- Serry. Russia, Mexico and Chile on Tuesday also raised their rates.

As for the Fed, it seems that the American central bank has learned from its communication error of 2013. Moreover, despite an inflation of 5% in the United States and the announcement of a less accommodating monetary policy of here at the end of the year, long rates have been trending down for several months. US 10-year rates remain very low, close to 1.3%. They are probably called upon to rise, unless they believe that growth will fall back very quickly. The key is to know how quickly and how far the rates will go up. “In the past, each time that American long rates have risen quickly, this has revealed situations in countries that are more fragile than estimated,” nevertheless warns Olivier de Boysson. As such, Turkey, Argentina, South Africa, Nigeria, Kenya and Ukraine are fragile, believe economists from Euler Hermes.

Another risk for emerging countries: the Chinese economy. “China is an engine of the economy of other emerging countries, and also an investor. However, the Chinese economy is very uncertain today, which leaves a risk hanging over emerging countries, ”said Irina Topa-Serry. However, as Selin Ozyurt, economist at Euler Hermes, puts it, “when China sneezes, emerging countries catch cold”.

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