Emerging economies should prepare for “episodes of economic turmoil” as the US central bank hikes its key rates and global growth slows due to the Omicron variant of Covid-19, warns the IMF on Monday.
The International Monetary Fund, which is due to publish its latest updated forecast on January 25, estimates for the moment that the global recovery should continue this year and next.
But “the risks to growth remain high due to the stubborn resurgence of the pandemic,” noted Stephan Danninger, Kenneth Kang, Helene Poirson, IMF economists in a blog post published Monday.
Since mid-December, the Omicron variant has been spreading rapidly around the world, with a record number of contaminations recorded for this fourth wave of the pandemic.
Although Omicron is less lethal than Covid-19 and previous variants, it comes with restrictions that compromise growth.
“Given the risk that this could coincide with a faster rate tightening by the Fed, emerging economies should prepare for episodes of economic turmoil,” write IMF officials especially as these countries are already facing “a high inflation ”and“ considerably higher public debt ”.
The US Federal Reserve (Fed) has signaled its desire to raise key rates faster and more aggressively than expected to contain runaway inflation in the United States, which is weighing on households and consumption, the engine of US growth.
A rise in policy rates means that the costs of refinancing the debt of a number of emerging countries denominated in dollars will increase. However, these countries are also lagging behind in the economic recovery and are therefore less able to absorb these additional costs.
“While dollar borrowing costs remain low for many, concerns about domestic inflation (…) drove several emerging markets over the past year, including Brazil, Russia and South Africa, began to increase interest rates, ”further note the IMF.
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Ultimately, faster Fed rate hikes could “shake up financial markets and tighten financial conditions globally,” add the blog’s authors.
The risk is a slowdown in demand and trade in the United States as well as the outflow of capital and currency depreciation in emerging markets.
The IMF urges emerging markets to take action “now (…) to reduce vulnerabilities”.
The Washington institution finally recommends “clear and coherent communication” of monetary policy plans to “improve understanding of the need to seek price stability”.