Emerging markets threatened by a new debt crisis

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Status: 08/24/2022 08:22

The evolution of interest rates in the United States is putting emerging countries under pressure and a new debt crisis is emerging. Such a crisis may also become a serious problem for Germany. by Thomas Spinler,

by Thomas Spinler, tagesschau.de

Concerns about a new debt crisis in emerging countries are becoming more pressing: Ayan Kos, chief economist and director of the World Bank’s Prospects Group, recently warned in the Japanese economic newspaper “Nikkei” that interest rates guiding interest would be lowered. increased rapidly. Central banks would put highly indebted emerging countries in a precarious position.

A few weeks ago, IMF chief Kristalina Georgieva warned that there was a risk of a downward spiral if debt reduction efforts were not accelerated quickly. Experts at US investment bank Goldman Sachs have been talking about the impending debt crisis for a long time. “For emerging markets, a stronger dollar and lower global risks mean the future is more challenging,” said Shaukat Bunlawala, head of multi-asset solutions at Goldman Sachs Asset Management.

Is a “perfect storm” coming?

“You can call the current combination of various negative factors a ‘perfect storm’ for emerging countries,” said Claus-Jürgen Gern, expert on global economy and global imbalances at the Kiel Institute for World Economy. (IFW). tagesschau.deReady The present is historically much higher, he pointed out. “This means that countries also have higher refinancing requirements. And this is now affecting interest rate changes in the United States.

A major reason for fears of a new debt crisis in emerging countries is the dollar, which has been appreciating for months. Not only is the euro under enormous pressure against the US currency. It is also growing strongly against other national currencies. This is linked to the aggressive interest rate policy of the US Federal Reserve (Fed), which has now raised the key interest rate to between 2.25 and 2.50%.

Higher risk, increased risk premium

The tightening of monetary policy is a serious problem for emerging countries: “The result of changes in interest rates is that investment capital, which has flowed into emerging countries over the past two years because interest rates interest rates were so low in the United States, are back.” crossing”, explains the IFW expert. This is also linked to the fact that risks for investment capital in emerging countries are higher due to debt levels and the risk of a global recession.

Many emerging market loans are denominated in dollars.

“Furthermore, investors are concerned that central bank monetary policy could become even tighter due to the risk of inflation,” Gern said. Also, since emerging markets tend to borrow and repay most of their debt in dollars, a stronger dollar makes borrowing more expensive. Settlements are becoming more difficult and the situation is likely to worsen due to rising interest rates.

Financial market players lending to States are aware of this. The risk premiums they demand also increase because the negative structure position increases the risk of loan default. Many emerging markets, already reeling from inflation, food shortages and the threat of recession, are now grappling with debt issues on top of the already difficult economic situation.

The benefits of commodity exporters are

The number of countries affected is significant: according to Georgieva, a third of emerging countries and two thirds of developing countries are already facing a crisis. “Due to the global rise in energy and raw material prices, countries that do not have their own resources, i.e. importers of raw materials, are now under pressure. Emerging countries need more support from commodity exporters. Possibility of current price developments,” says Gern.

Experts point out that Turkey, for example, is one of the emerging countries particularly affected as an importer of raw materials. “The country is heading for a serious crisis, in particular because monetary policy there is fueling inflation with unreasonably low interest rates.”

Kenya facing the debt problem

Kenya is also among the countries that could be in trouble. Patrick Henisk, country analyst at Heleba, sees Kenya’s new president, William Ruto, facing a mountain of debt. According to Henish, Kenya’s national debt stood at around 70% of gross domestic product (GDP) in the financial year 2021/22.

“The high proportion of foreign countries, which account for half of the total national debt, is particularly problematic. The Kenyan shilling’s exchange rate, which is currently hitting a new all-time low every month, exacerbates the debt stability problem, Heinish said in a current analysis. There have been protests over the high cost of living in recent weeks.

No threat of infection to the global financial system

Gern considers the risk that an emerging market debt crisis could pose a threat to the global financial system: “As far as I know, there is no alarming concentration of unsecured lending in large financial institutions and the banks. So I think the global financial system is unlikely.

Moreover, the financial systems of emerging countries are stronger than ever. The banking system in Turkey also appears stable. “Financial problems in some countries are unlikely to lead to a wave of financial crisis in the emerging markets universe, as was the case with the debt crisis in 1997/98,” says Gern.

Important market for the German economy

However, this does not mean that the subject should be neglected for the good of the German economy. In this country, a debt crisis and the associated recession would result in emerging countries, since they now represent almost half of world production. And emerging markets account for more than half of global growth.

Gern therefore warns: “For Germany as an exporting nation, emerging countries have become important markets. Even if there is no apparent debt crisis – the economic slowdown in emerging countries that is expected due to the current deterioration of the general financial system. The conditions in this country will make themselves clearly felt.

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