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Emerging markets brace themselves for rate hikes with debt at records

(Bloomberg) – Alarm bells are ringing in emerging markets as countries prepare for a new era of rising interest rates. After an unprecedented period of rate cuts to prop up economies torn by Covid-19, Brazil is expected to hike rates this week, and Nigeria and South Africa could soon follow suit, according to Bloomberg Economics. Russia is considering tightening monetary policy earlier than previously announced, said a person who knew about their central bank’s discussions. Behind the shift: renewed optimism on the outlook for the global economy amid greater US stimulus. This is driving up commodity price inflation and global bond yields, while weighing down developing country currencies as heads of capital elsewhere. The turnaround in politics is likely to cause the greatest pain during the pandemic to economies that have not yet recovered or whose debt loads are rising. In addition, the gains in consumer prices, including food costs, which will result in higher rates, can take the greatest toll on the world’s poorest. “The history of food prices and the history of inflation are important to the problem of inequality in terms of a shock, which has very unequal effects,” said Carmen Reinhart, chief economist at the World Bank, in an interview, citing Turkey and Nigeria as countries at risk. “What you may see is a series of rate hikes in emerging markets trying to manage the effects of the currency slide and contain the upward trend in inflation.” Investors are on their guard. The MSCI Emerging Markets Index of currencies fell 0.5% in 2021, after rising 3.3% in the previous year. The Bloomberg Commodity Index is up 10%, with crude oil returning to its highest level in nearly two years. Rate hikes are a problem for emerging markets as borrowing related to pandemics has spiked. Total outstanding debt in developing countries rose to 250% of total countries’ gross domestic product last year as governments, businesses and households worldwide raised $ 24 trillion to offset the aftermath of the pandemic. The largest increases were recorded in China, Turkey, South Korea and the United Arab Emirates. What Bloomberg Economics Says … “The tide is turning for the central banks of the emerging markets. The timing is unfortunate – most emerging markets have not yet fully recovered from the pandemic recession. – Ziad Daoud, Chief Emerging Market Economist. Click here for the full report. The Organization for Economic Co-operation and Development and the International Monetary Fund have warned governments not to remove the incentives too soon. Moody’s Investors Service says there is a dynamic that will stay here. “While asset prices and debtor market access have largely recovered from the shock, debt ratios have shifted more permanently,” said Colin Ellis, chief credit officer for the rating firm in London. and Anne Van Praagh, chief executive officer for fixed income in New York, wrote in a report last week. “This is particularly evident in states, some of which have spent unprecedented sums to fight the pandemic and sustain economic activity.” The outlook for emerging economies is usually slower with the introduction of vaccines. Citigroup Inc. does not believe such economies will form herd immunity until the end of the third quarter of this year and the first half of 2022. The developed economies will do so by the end of 2021. The first to change course will likely be Brazil. Policy makers are expected to hike the key rate 50 basis points to 2.5% when they meet on Wednesday. The Turkish central bank, which has already started rate hikes to prop up the lira and tame inflation, meets with a move of 100 basis points the following day. On Friday, Russia could signal that tightening is imminent. According to the person familiar with the matter, the key rate may even be raised by 125 basis points or more from the current 4.25% before the end of the year. According to Bloomberg Economics, Nigeria and Argentina could raise their rates as early as the second quarter. Market figures show that expectations are also rising for a tightening of politics in India, South Korea, Malaysia and Thailand. “Given higher global interest rates and core inflation expected to stabilize next year, we are moving forward our forecasts for monetary policy normalization for most central banks to 2022, late 2022 or 2023 earlier,” wrote analysts at Goldman Sachs Group Inc. on Monday in a report. “For RBI, the liquidity squeeze this year could turn into a hiking cycle next year given the faster recovery path and high and sticky core inflation.” Some countries may still be better able to weather the storm than they were during Taper Tantrum. of 2013, when bets on cuts in the US economy sparked capital outflows and sudden swings in currency markets. In emerging Asia, central banks have built critical buffers, in part by adding $ 468 billion to their currency reserves last year, most of them in eight years. Even higher rates will expose countries like Brazil and South Africa, for which they are ill-positioned. Sergi Lanau and Jonathan Fortun, economists at the Washington-based Institute of International Finance, said in a report last week: “Compared to developed countries, they offer Low Emerging Interest Rates Emerging Markets is more limited, ”they wrote. “Higher interest rates would reduce the tax margin considerably. Only high-growth Asian emerging markets could run primary deficits and stabilize debt. “Among the most vulnerable are markets that remain heavily reliant on foreign currency debt, such as Turkey, Kenya and Tunisia, William Jackson, the key emerging economies with Capital Economics in London, said in a report. But yields on government bonds denominated in local currency have also risen, which is damaging the Latin American economies the most. Other emerging markets may be forced to postpone their own fiscal measures after the US $ 1.9 trillion stimulus plan was passed, a threat highlighted by Nomura Holdings Inc. more than a month ago: “The Governments may be tempted to heed Janet Yellen’s call to take big fiscal measures this year to keep running large or even larger budget deficits, ”said Rob Subbaraman, director of global research at Nomura in Singapore, in a recent report. “That would be a dangerous strategy, however.” The net interest burden on emerging market governments is more than three times that of their developed world counterparts, while emerging economies are both more inflation-prone and dependent on external funding, 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 proportion of production. (Updates with Russia story from the second paragraph) For more articles like this, visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP