According to an analysis released today by the British Reuters news agency, developing countries are in the position of the most vulnerable economies under the long-term high interest rate policy signaled by US Federal Reserve Chairman Jerome Powell last week.
In the news, it is reminded that the New York-based financial analysis company S&P Global has classified the lending risk of financial institutions in Turkey, South Africa and Argentina as high or very high.
Eswar Prasad, Professor of Economics at Cornell University, said: “Fed increasing interest rates and keeping[rates]high will damage borderline economies like Sri Lanka and Turkey.” says and adds:
“In a two to three year time frame, things will start to get difficult… If it is certain that the Fed will keep interest rates high for a long time, the pressures can be felt immediately.”
In his August 26 speech, Powell said the Fed would raise rates as needed to restrain growth and keep rates “for a little while longer” to curb inflation, which is now more than three times the bank’s 2 percent target.
Inflation in the USA is at its highest level in the last 40 years and is thought to have not peaked yet.
S&P Global; He says the credit risk of financial institutions is high or extremely high in many countries, including China, India and Indonesia.
‘Time of crisis’
“It’s a time of crisis for the Fed,” says Professor Peter Blair Henry of New York University’s Stern School of Business.
“The credibility of the last 40 years is at stake, so they will reduce inflation regardless of whether it’s done damage in developing countries.”
Many developing countries borrow in dollars.
FED’s increase in interest rates raises borrowing costs. In addition, it increases the risk premium of developing countries, making it even more difficult for them to borrow.
It is predicted that high interest rates will increase the value of the dollar against emerging economy currencies, increasing import costs and increasing inflationary pressure.
It is stated in the news that countries such as China and India are not affected by this pressure, but smaller countries such as Turkey and Argentina are clearly victims of it.
“Real investment returns are already at or near problematic levels in our frontier and low-income economies,” said Pierre-Olivier Gourinchas, IMF chief economist. says and continues:
“This is the case with around 60 percent of low-income countries and 20 developing and borderline countries. They still have access to markets, but borrowing conditions have definitely gotten worse.”