Emerging markets to buckle up, warns WB

US interest rate hike, coupled with China’s slowdown may mean capital flight

WASHINGTON: Clouds are gathering over the world’s economic leaders ahead of a meeting in Peru to confront the fallout of a China-sparked commodity price crash that has rocked once-powerful emerging markets.

The impending prospect of a US interest rate hike, the first in nine years, further darkens the horizon for the world’s finance ministers and central bank governors who meet in the Peruvian capital of Lima next week.

There is “reason to be concerned,” International Monetary Fund Managing Director Christine Lagarde said in the run-up to the October 9-11 meetings of the IMF and World Bank. “The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility,” the IMF chief added.

“There has been a sharp deceleration in the growth of global trade. And the rapid drop in commodity prices is posing problems for resource-based economies.”

The IMF is to release new forecasts for the world economy on Tuesday, likely to reflect the gloom hovering most of all over emerging-market economies, whose woes have overshadowed crises in debt-troubled Greece and Ukraine.

“It is difficult to gauge the possible negative confidence effects on the other emerging-market economies and the global economy as a whole,” said Andreas Dombret, a member of the executive board of the Bundesbank, Germany’s central bank.

That was the conclusion of the Organisation for Economic Cooperation and Development when it slightly lowered its forecasts for global growth in mid-September.

The prospect of a US rate rise, which would boost returns on US investments, has raised concerns at the IMF and World Bank, worried that it could lure investors to switch funds out of emerging economies and into the United States.

Besides the flight of capital from emerging economies, a shift of capital into the United States could further strengthen the dollar, the currency in which the debt of many companies is based.

Companies in emerging economies, where corporate debt has quadrupled in the past 10 years, according to the IMF, could pay a steep price, forced into bankruptcies that hit banks and public finances. “A vicious cycle,” Lagarde said.

“They would do well to buckle their seat belts in case the ride gets bumpy,” the World Bank has warned. 

Published in The Express Tribune, October 3^rd, 2015.

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