IMF- emerging economies must prepare for Fed policy tightening

Highlights

  • What happened in 2021 lays a ground for how the market would react amid a pandemic. 
  • According to the IMF, the coming months look challenging for emerging economies, keeping in mind factors like elevated inflation and high public debt.
  • High interest rates may create another chaos and tighten the global financial conditions.

The year 2021 witnessed sharp fluctuations in the world economy. From the Great Resignation to supply chain barriers, high inflation in the US followed by increase in interest rates by several federal banks. And, as we have now entered 2022; things might take a different turn depending upon how Omicron and market variables act in the following months.  

The economic variables of 2021 in a nutshell  

Looking at things in hindsight is significant when it comes to planning for the future. What happened in 2021 lays a ground for how the market would react amid a pandemic; what the policymakers and industrialists could learn for the next financial term.

As vaccine rollouts began across the world, recovery entered the room; however, the global economic recovery was unsteady throughout 2021. The primary cause was the disturbances in the supply-chain. 

Following which, prices shot up, and inflation is still not loosening its grip. According to the IMF, inflation is rising at the fastest pace in the last four decades. So, who suffers the most because of all these issues? - the emerging economies.

 2022, a challenging year for emerging economies

Source: Pixabay

 GOOD SECTION: Which sectors gain from rising interest rates? 

Emerging economies at the bottom of the heap 

According to the IMF, the coming months look challenging for emerging economies, keeping in mind factors like elevated inflation and high public debt. Because of the pandemic, public debt is on high-rise. The average gross government debt in the emerging economies has increased by around 10% since 2019 and it reached around 64% of the total GDP by the end of 2021.

And, to make matters worse, we now have Omicron playing a significant role in the world economy. Omicron spread would again increase pressure and disturbances in the supply-chain.  

 IMF warns emerging economies must prepare for fed policy tighteningSource: Pixabay

ALSO READ: ASX 200 to trade lower amidst fears of interest rate hike by Fed 

So, what does the IMF warn?  

Due to high inflation, wage prices are shooting up high in the US. Due to high wages and supply bottlenecks prices can rise further high, thus rapid inflation. Because of which, the Federal bank would increase interest rates. 

High interest rates may create another chaos and tighten the global financial conditions. IMF also predicts currency depreciation in the emerging economy in 2022 due to all the above factors. So, what happens at last - due to Fed tightening, vulnerable countries will suffer the most. 

The IMF has observed that in the last couple of months, emerging economies have significantly suffered due to rising public and private debts. Because of which, currencies of emerging nations and low-income countries have made larger movements relative to the US dollar. 

Bottom line  

Conclusively, as the IMF has announced, economies must prepare for fed policy tightening. Slow recovery and simultaneously increasing vulnerabilities can create high debt and currency depreciation loops for the emerging economies.

Comment


Disclaimer