Emerging markets seen under pressure from expanded debt burdens

EMERGING MARKETS (EMs) will bear the brunt of the economic fallout as interest rates are driven higher to contain inflation, after their governments took on additional debt during the pandemic, Fitch Solutions Country Risk and Industry Research said.

While real gross domestic product growth has also been trending downward in developed markets since January, EMs are carrying far more debt than is typical due to the spending required to deal with the global public health crisis, it said in a report.

Cedric Chehab, the global head of Country Risk for Fitch Solutions, said elevated inflation is driving monetary authorities everywhere to tighten their policy stance.

The Federal Reserve is expected to hike rates by another 50 to 75 basis points in July, which might weaken other currencies even further, Mr. Chehab said in a webinar on Tuesday.

And while the Chinese economy is expected to grow by 3.6%, it is still below the Fitch Solutions target of 5.5%. China is also grappling with the economic consequences of its Zero-COVID policy, which dictates lockdowns for even minor outbreaks, as well as risks in its property market, also heavily indebted.

According to the report, demand for energy and shelter is expected to keep inflation elevated.

The energy crisis is expected to go on as long as the Ukraine war continues, Mr. Chehab said. The war has led the West to sanction Russia, a major energy exporter; Moscow has retaliated by cutting gas exports to Europe, setting off a scramble for other fuels and driving prices higher.

Fitch Solutions added that political risk has become elevated in various parts of the world as government finances weaken, with inflation threatening social stability.

EMs are also at risk of capital flight due to the pressure on their currencies, he said.

Mr. Chehab expects a sharp slowdown in the US economy, driven by declining housing prices as financing costs rise.

Within Asia, in particular, Fitch Solutions has downgraded its outlook for some countries deemed at risk for unrest, though some uncertainty has been mitigated by “the conclusion of several key elections” which strengthens the case for policy continuity, the report added. — Diego Gabriel C. Robles