Emerging markets face global interest rate volatility

Major emerging markets have shown resilience in the face of changing international trends, but tough times may lie ahead.

Global interest rates have been running high in recent months, especially those for long-term government bonds. According to a report by IMF, the yield on the 10-year US Treasury bond rose again to fall in October from a 16-year high of 5 percent. Interest rate developments in other developed economies have also been high.

Emerging market economies, however, have seen more moderate statistical movements. Global Financial Stability Report, shows that the average sensitivity to US 10-year interest rates in emerging markets in Latin America and Asia has dropped by two-fold three and two fifths respectively. During the current cycle of monetary policy tightening, compared to the taper tantrum of 2013.

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Even if the bottom line is less explained by the divergence of monetary policy between the central government and the economy in the last two years, it still calls ‘to question the conclusion of economic literature that shows significant spillover of interest rates. from advanced economies to developing countries. market. In particular, major emerging markets have been better protected by lower global interest rates than would be expected based on historical experience, particularly in Asia.

 There are other signs of stability in the big market emerging during these volatile times. Exchange rates, stock prices, and government media have changed by a small margin. Even more remarkably, foreign investors have not abandoned their bond market, unlike previous events where large capital outflows followed an increase in global interest rates, especially in 2022. This persistence is not just luck. 

Many emerging markets have spent years improving their policies to reduce external pressures. They have built up their foreign exchange reserves over the past two decades. Many countries have completed their exchange rate regimes and moved to floating exchange rates. In many cases, large fluctuations in exchange rates have contributed to macroeconomic stability. Public debt systems have also become more flexible, and savers and investors are more confident in investing in local financial assets, thus reducing dependence on foreign capital. 

Perhaps more importantly, and in close alignment with IMF advice, major emerging markets have strengthened the independence of their central banks, improved their policy frameworks, and gained more credibility. The central banks of these countries have gained credibility since the start of the pandemic by tightening monetary policy promptly and thus bringing inflation back towards target. 

During the pandemic, many central banks have raised interest rates before their counterparts in advanced economies. On average, emerging markets have added 780 basis points to their monetary policy rates, compared to an increase of 400 basis points for advanced economies. 

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Broad interest rate spreads for emerging markets that raised rates created buffers for emerging markets that buffered external pressures. In addition, rising commodity prices during the pandemic also contributed to the external conditions of emerging commodity markets.

Global economic conditions have also remained positive during a period of tightening global monetary policy, particularly over the past year. This is in contrast to previous bullish events in advanced economies, which were associated with the strengthening of global financial conditions.

Looking forward

Even as they reap the rewards of years of conservation and policy pursuits, policymakers in major emerging markets must remain vigilant and watch for challenges in the “mile the last” of the decline in the economic and growth divide. 

Three challenges emerge

Interest rate spreads are shrinking as investors expect some developing markets to cut rates faster than advanced economies, which could cause capital flows to shift from emerging markets and developing economies;

The share of advanced economies continues to attract capital from the financial markets, which can fuel the emerging capital system;

Global interest rates are still volatile as investors, reacting based on central banks and data, are wary of surprises in economic data. It is estimated that central banks in advanced economies will cut rates significantly this year which could be dangerous for emerging markets. If this turns out to be false, investors can pay their interest rates to a higher level in the long term, which will measure the price of risky assets, including emerging markets and bonds.

As predicted in the latest World Economic Outlook update, the decline in emerging markets occurs not only through traditional business channels but also through financial channels. This is especially important today, since many lenders around the world rely on their loans, weakening the balance sheets of banks. Bank loan losses in emerging markets have implications for weak economic growth, as the Global Financial Stability Report indicated in October of 2023.

Emerging markets – developing economies with small capital markets that enjoy investment – and low-income countries face greater challenges, chief among them is no money coming from outside. Borrowing rates remain high to prevent these economies from accessing new funds or transferring their existing debt to foreign investors. 

High-interest rates reflect the risks associated with emerging market assets. The return on the dollar in these assets has been lower than in other developed economies in this high-stakes environment. For example, emerging market contracts for high-yield producers, or low-grade issuers, have produced returns of about zero percent over the past four years, while high-yield bonds of The United States have produced a return of 10 percent. 

The so-called private loans given by non-banks to low-income American companies brought even more. The dramatic difference in returns may not be a good fit for the external financial prospects of emerging markets, while foreign investors with the ability to invest across asset classes may find other valuable assets and assets. and the abundance is high.

 While these challenges facing emerging markets and regional economies require careful attention from policymakers, there are also many opportunities. Emerging markets continue to experience high economic growth rates that are expected to be high, capital flows to stock and bond markets are still important, and the legal system is improving in many countries. As a result, the stability of emerging markets is important for global investors since the pandemic brought by the ongoing series of peace instability could continue for long.

Security policy

Emerging markets should continue to build on their political confidence and remain vigilant. With high fluctuations in global interest rates, their central bank should continue to be involved in price inflation, while the rest of the data depends on their goals. Managing money to focus on the stability of the macroeconomic skills to support the external, IMF command that provides the instructions in the course of the motor.

The economy in the lowest national economic countries can participate by cooperating and building financial development. They should be confident that monetary policy measures will be better aligned with the climate of global interest rates.