Emerging economies should prepare for potential tough times as the US Federal Reserve prepares to raise interest rates and global economic growth slows due to the Omicron variant of Covid-19, the IMF warned on Monday.
The International Monetary Fund, which is scheduled to release updated economic forecasts on January 25, said that, for now, the global economic recovery from the ravages of the pandemic should continue this year and next.
But “risks to growth remain elevated by the stubborn resurgence of the pandemic,” IMF economists Stephan Danninger, Kenneth Kang and Helene Poirson wrote in a blog post.
The highly contagious Omicron strain has spread like wildfire around the world since mid-December, causing a record number of new COVID cases in the latest wave of the global health crisis.
Omicron, which appears to cause less severe illness than previous strains of the coronavirus, is prompting countries to reinstate health measures that hamper economic growth.
“Given the risk that this could coincide with a faster adjustment by the Fed, emerging economies should prepare for possible episodes of economic turmoil,” economists said, as these countries also face high inflation and substantially higher public debt. .
The Federal Reserve has signaled that it will raise key interest rates earlier and more aggressively than it had planned, to counter the rampant inflation in the US that is affecting US households and consumption. , the engine of economic growth in the US
Higher interest rates mean that financing costs will increase for some emerging economies with dollar-denominated debt.
These countries are already lagging behind in global economic recovery and are therefore less able to absorb additional spending.
“While the costs of borrowing in dollars remain low for many, concerns about domestic inflation and stable foreign financing led several emerging markets last year, including Brazil, Russia and South Africa, to start raising interest rates. ”Said the IMF.
Faster rate hikes by the Fed could shake financial markets and lead to tighter financial conditions globally, the blog says.
The risk is that there will be a slowdown in demand and trade in the US, as well as capital flight and a depreciation of the dollar in the markets of emerging countries.
The IMF recommended that emerging economy nations “tailor their response based on their circumstances and vulnerabilities.”
And central banks that are raising interest rates to fight inflation should engage in “clear and consistent communication” so that people better understand the need for price stability, the international lender said.