IMF warns Fed hikes to hit struggling economies

Richard HendersonReporter

Updated Jan 24, 2022 – 3.34pm, first published at 3.04pm

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International Monetary Fund managing director Kristalina Georgieva has warned Federal Reserve interest rate rises this year will hit struggling emerging markets that rely on US dollar funding, adding pressure on the global economic recovery.

The Fed is primed to raise the cash rate in March, according to Wall Street consensus, for the first time since the pandemic struck, following a sharp uptick in consumer prices.

The central bank’s monetary policy committee meets this week and is expected to ramp up its hawkish rhetoric before eventually lifting rates from near zero to tame annual inflation running at levels not seen in four decades. Market pricing anticipates four Fed rate rises this year.

IMF managing director Kristalina Georgieva says higher dollar funding costs will hurt struggling emerging market economies. Bloomberg

However, the central bank faces a “delicate balancing act between fighting inflation and protecting the recovery,” Ms Georgieva said during a World Economic Forum event held virtually, instead of the conference’s usual setting in Davos, Switzerland.

“The issue here is that what the Fed does has implications for the US, for other countries, and especially for those that have a high level of dollar-denominated debt,” she said.

Higher interest rates may tame US inflation, but “could throw cold water on what for some countries is already a weak recovery”.

This would add pressure on the global economy during a crucial period in the rebound from the 2020 recession.

“Where my worries lie is for low-income countries where 60 per cent of them are in debt distress or are in danger of debt distress, twice as much as in 2015,” Ms Georgieva said.

“We have to be careful in how we support those that without international support, will be in deep, deep trouble.”

Ms Georgieva said countries heavily reliant on US dollar funding should “act now” to address the potential for higher debt costs before higher rates weigh on growth.

“If you can extend maturities, please do it. If you have currency mismatches, now is the moment to address them.”

A group of 74 of the poorest nations are facing $US35 billion ($49 billion) in debt payments this year alone, according to a World Bank analysis released this month, which would mark a 45 per cent increase from 2020 levels.

The increase reflects growth in borrowing across emerging markets to support healthcare systems that have come under strain through the pandemic, according to the World Bank.

The bank specifically highlighted Sri Lanka, Ghana and El Salvador as among the countries facing the most difficult debt repayment challenges.

El Salvador’s decision last year to adopt bitcoin as legal tender faced further criticisms after a rapid decline in the value of digital currencies over the past week.

Bitcoin touched its lowest level in six months at the weekend and has lost almost half its value from a peak in November, while other popular digital coins have also suffered sizeable declines.

Ether, the largest cryptocurrency after bitcoin, has fallen by a similar margin from its peak last year, while dogecoin, a digital asset co-launched as a joke by an Australian software engineer, has shed 84 per cent of its value from a 2021 high.

Economist Nouriel Roubini, chief executive of Roubini Macro Associates, said the broad declines marked “a total crypto massacre”, and worried about the implications for El Salvador.

“El Salvador’s experiment with bitcoin is an unmitigated disaster,” he said, highlighting the falling value of its sovereign debt as investors deserted the country’s bonds.

Ratings agency Moody’s said this month that the move to adopt bitcoin had weighed on El Salvador’s credit rating.

The country’s official holdings of bitcoin were unlikely to affect its ability to meet liabilities, although that would change if it purchased more of the digital coins, Moody’s said.

Richard Henderson is a markets reporter based in our Melbourne newsroom. Connect with Richard on Twitter. Email Richard at richard.henderson@afr.com.au