If the Federal Reserve raises the U.S. interest rate as predicted this week, it is not expected to lead to a global financial crisis. However, some emerging markets may be impacted, especially those that are struggling with the slowdown in China, low commodity prices and increasing geopolitical risks, according to a Dec. 14 report from Atradius.
“Concerns about the creditworthiness of companies in emerging markets especially is a rising concern because they have borrowed heavily over the past decade. Increasing business failures are therefore to be expected,” states the report, U.S. Interest Rate Rise: Emerging Markets at Risk.
The most vulnerable countries are Turkey, Indonesia, South Africa and Malaysia, which all have high external financing. As a result, “these countries are less able to deal with the impact of the normalization of U.S. monetary policy on external financing: making it more difficult and more expensive,” according to Atradius. Brazil and Russia are also susceptible due to companies that have borrowed externally without sufficient hedging as well as pressure from a shrinking economy.
The rate increase is part of the normalization process of U.S. monetary policy. In 2008, the Fed lowered interest rates after the housing market crash, which resulted in an “upward pressure on emerging countries’ currencies, rising equity and bond prices and falling interest rates,” reads the report. “Lower interest rates, both external and domestic, in turn boosted borrowing and economic growth.”
Earlier this year, the Fed began preparing to raise the interest rate, which has been extensively communicated and long anticipated by markets. “The emerging markets in general are better equipped to withstand an interest rate hike,” Atradius says.
- Jennifer Lehman, marketing and communications associate.