IMF Warns of Risks on Emerging Markets from High US Interest Rates

International Monetary Fund (IMF) Executive Director Kristina Georgieva played down the risk of any negative impact due to the monetary policy divergence between Europe and the United States, but warned that the matter could be more serious in emerging markets.

Georgieva said this issue is much more serious for countries where the impact of higher US interest rates is greater, specifically in many emerging market economies.

It is noteworthy that high interest rates in the United States make emerging market debt, which is often priced in US dollars, more expensive. It can lead to capital flight abroad, as investors tend to achieve better returns in the United States.

The International Monetary Fund wrote, in a chapter of its World Economic Outlook report before the spring meetings held last March: “Since 2000, the spillover effects resulting from domestic shocks in the emerging markets of the G20, especially China, have increased and have become comparable in size to those.” caused by shocks in advanced economies.

It added that countries - starting from China - the second largest economy in the world, to Argentina, which is vulnerable to debt default - have become an integral part of the global economy. Especially through trade and commodity production cycles, it is no longer “just a recipient of global shocks.”

The Fund believes that since China joined the World Trade Organization in 2001, the G20 emerging markets have doubled their share in global trade and foreign direct investment, and now represent about 30 percent of global economic activity, and about a quarter of global trade. They have also become increasingly systemic, through their integration into global value chains, with the ability to move global markets. This implies - according to the IMF - that the indirect effects on growth resulting from shocks arising in these economies could have much greater repercussions on global activity.

The International Monetary Fund indicates that the ten emerging economies in the G20 (Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Turkey) have succeeded in doubling their combined share of global GDP since 2000, and that this “not only helped provide global momentum for growth and trade; “But it was also a force for reducing production fluctuations - thanks to diversification between countries - and convergence in income and living standards.”

Noting that the Fund’s data shows the growth of the gross domestic product in Saudi Arabia from $189.5 billion in 2000 to $1.1 trillion in 2023.

However, fading emerging market growth prospects in the G20 have driven more than half of the 1.9 percentage point slowdown in medium-term global growth since the global financial crisis; China accounts for about 40% of this slowdown.

The medium-term growth outlook for emerging markets in the G20 has weakened by 0.8 percentage points to 3.7%, as a result of the effects of the pandemic and price shocks following the Russia-Ukraine war.

Overall, spillovers have increased approximately threefold since the early 2000s, led by China, while spillover risks from Brazil, India and Mexico have also increased moderately.

China is struggling to weather long-standing economic headwinds, with high levels of local government debt limiting infrastructure investment and the real estate market entering its fourth year of free fall. Consumer and investor confidence is also under pressure.

The IMF said that the Russian economy's shift towards Asia is likely to change the direction of spillover effects.

Across the G20 emerging markets, the IMF has warned that average growth of 6% per year over the past 20 years would slow, and cut its medium-term growth forecast to 3.7%.