Photo taken on April 19, 2022 shows the IMF Headquarters in Washington, D.C., the United States. (Photo by Ting Shen/Xinhua)
Aside from increasing debt vulnerabilities and reducing policy space, Fed's more aggressive rate hikes could also add pressure to capital outflows in emerging markets, an IMF official noted.
by Xiong Maoling, Liu Yang
WASHINGTON, April 21 (Xinhua) -- If the U.S. Federal Reserve tightens its monetary policy faster than expected, emerging markets - especially those with high debt levels - could be in a difficult situation, an International Monetary Fund (IMF) official has said.
"So there is a concern that emerging market economies that have borrowed heavily in dollars, and especially on short maturity, could find themselves in a difficult position," Malhar Nabar, division chief at the IMF's Research Department, told Xinhua in a virtual interview earlier this week.
"If they try to roll over their debt, or they try to refinance their debt, with rising interest rates, it might become more difficult for them to do that, and that would lead them to cut back on spending in other areas," Nabar continued.
"And that would then lead to a slowdown in their economies," he said. "Or if they're not able to meet their debt service obligations, then of course, that would create wider debt problems."
Aside from increasing debt vulnerabilities and reducing policy space, Fed's more aggressive rate hikes could also add pressure to capital outflows in emerging markets, the IMF official noted.
"If the gap between the policy rates widen sufficiently, you could see pressure for more outflows, in response to the higher returns that they will be getting elsewhere," he said. "So that could pose some difficulties if it creates some financial volatility."
The other aspect is that, he added, when the United States is raising rates, which tends to strengthen the dollar, that leads to more inflation in emerging market economies because their currencies depreciate against the dollar. "So the imported inflation rises in those countries," he said.
In its latest World Economic Outlook report released Tuesday, the IMF slashed global growth forecast for 2022 by 0.8 percentage points to 3.6 percent amid the Russia-Ukraine war.
Photo taken on March 19, 2020 shows U.S. dollar banknotes in Washington D.C., the United States. (Xinhua/Liu Jie)
Nabar, who heads the World Economic Studies division in the IMF's Research Department, which produces the report, said the ongoing war, elevated inflation, COVID-19 pandemic, rising interest rates, and climate change are the most important challenges for the global economy.
The latest projection, he noted, is based on the assumption that the negative impacts from Omicron variant "start fading from the second quarter onwards," and in most places, by the end of 2022, there would be "relatively low adverse health outcomes" associated with Omicron.
The projection is also based on the assumption that the sanctions against Russia that had been announced as of March 31, when IMF closed its forecast, would remain in place "indefinitely."
The IMF, however, presented a downside scenario, where sanctions are broadened mid-2022 to include additional embargoes on oil and gas and the disconnection of Russia from much of the global financial and trade system.
Nabar said if sanctions expand significantly and lead to "a much bigger drop" in Russian energy exports, it would further disrupt supply chains, inflation would rise even more and inflation expectations would increase, which would require faster monetary tightening.
In this downside scenario, global GDP decreases by about 2 percent by 2023 compared with baseline projection; the decrease is somewhat persistent, and global activity remains about 1 percent lower than in the baseline by 2027.
For the Chinese economy, the current IMF projection shows it's expected to grow 4.4 percent this year, 0.4 percentage points lower than the previous projection, to be followed by a 5.1-percent growth in 2023.
Nabar said the downgrade largely reflects the current lockdowns and the impact they are having on economic activity.
"But if the lockdowns were to extend past April or they were to become more widespread and move into other parts of the country, then there could be scope for further changes to our forecast for China," he said. ■