EFFECTS OF INCREASING IN FED’S INTEREST RATE ON THE EMERGING MARKETS

The FED announced to withdraw the QE (quantitative easing) in Oct 29th, 2014 and will increase the intreast rate. How it will affact the EMEs? The recent ecomonic performance in EMEs. Why is the Fed considering rising interest rates now? How does the global market affect the Fed’s decision? How an interest rate hike would affect emerging market?

THE EFFECTS OF INCREASING IN FED’S INTEREST RATE ON THE

EMERGING MARKETS

Truong Van Hung

신신신

1.Introduction

The FED announced to withdraw the QE (quantitative easing) in Oct 29th, 2014 and will increase the intreast rate.

 How it will affact the EMEs?

 The recent ecomonic performance in EMEs.

 Why is the Fed considering rising interest rates now?

 How does the global market affect the Fed’s decision?

 How an interest rate hike would affect emerging market?

2.The recent economic performance in

EMEs

The BRICs:

 Represent over 42% of the world population.

 Combined nominal GDP of US$16.039 trillion.

 It is estimated that the combined GDP (PPP) would reach US$50 trillion mark by 2020.

The recent economic performance

in EMEs

China

 Stock market reaches a new low in this September.

 Chinese economy grew an annual 6.9 percent in the third quarter of 2015, slightly down from 7.0 percent.

GDP growth of China (YoY)

The recent economic performance

in EMEs

Brazil

 The 7th largest economy in the world and the largest in Latin America

 The country’s trade is driven by its extensive natural resources and diverse agricultural and manufacturing production

 Bureaucracy, corruption and weak infrastructure remain the biggest obstacles to economic development

The recent economic performance

The recent economic performance

in EMEs

South Africa

 Advanced 1 percent year-on-year in the third quarter of 2015.

The recent economic performance

in EMEs

India

 Expanded 7.4 percent year-on-year in the three months to September of 2015.

The recent economic performance

in EMEs

Most of the EMEs in a difficult economic situation.

 Russian and Brazilian economies are falling into deep recession

 Russian and Brazilian economies are falling into deep recession

 Indian economy is presently operating in a very challenging

environment partly

3-Why is the Fed considering rising

interest rates now?

The current performance of US economy

 The Real GDP growth (based on 2009 dollars) grew by 3.7% during the second quarter and by 2.1% in 3nd quarter 2015

3-Why is the Fed considering

rising interest rates now?

Unemployment rate is within the target range.

 FED's goal: To keep unemployment rate between 5.2% - 5.5% in long-run.

 The trailing 12 months unemployment rate is 5.5%, which is still satisfactory.

3-Why is the Fed considering rising interest rates now?

Current level of US interest

rate.

 The US was hit by the crash in its

housing market and banking

sector between 2007 and 2009

 It's been nearly 10 years since

the FED raised its benchmark

interest rate

 US economy has been improving

4- How does the global market affect the

Fed’s decision

9-13

 The slowdown in Chinese economy & EMEs as well

 Falling Commodity Prices

 Slowing Global Demand

4- How does the global market affect the

Fed’s decision

9-14

 The slowdown in Chinese economy & EMEs as well

 The stock market turmoil (fluctuated wildly)

4- How does the global market affect the

Fed’s decision

9-15

 The slowdown in Chinese economy & EMEs as well

 China devalued Yuan against $ to boost the export.

4- How does the global market affect the

Fed’s decision

9-16

 Falling Commodity Prices: because of slowing Chinese

& global demand for Commodity  US inflation rate.

4- How does the global market affect the

Fed’s decision

9-17

 Falling Global Demand

 Brazilian & Russian Economies Fall into Deep Recession.

 Euro Zone is still struggling to get out of deflation.

5- How an interest rate hike would affect

emerging market

 Capital flight ( flight to quality)

 Triggering global debt crisis

Copyright © 2008 Pearson Addison-Wesley All rights reserved. 9-18

5-1 Capital Flight

 Capital flight (flight to quality)

 moving capital away from

riskier investments to the

safest investment vehicles

 The recovery of US economy Higher

interest rate.

Copyright © 2008 Pearson Addison-Wesley All rights reserved. 9-19

 Economic slowdown/ Recession & the currency devaluation in

EMEs

 Investments in US market promise safer & higher return

than in EMEs & FMEs.

 Encourage further capital outflows from EMEs, FME to

U.S markets.

Capital flows to EMEs

Copyright © 2008 Pearson Addison-Wesley All rights reserved. 9-20

5-2 Triggering global debt crisis

Copyright © 2008 Pearson Addison-Wesley All rights reserved. 9-21

 The majority of emerging market debt is in US dollars due to

 Loose money policy in central bank to stimulus the economies after

crisis in US

 Ultra-low interest rate

High debt in both advanced economies and EMEs

Copyright © 2008 Pearson Addison-Wesley All rights reserved. 9-22

5-2 Triggering global debt crisis

Copyright © 2008 Pearson Addison-Wesley All rights reserved. 9-23

 According to WB:

 Dollar loans to EMEs

have doubled to $3 trillion

since the Lehman Brother

crisis

 Borrowing at abnormally

low real interest rate of

1%

 Roughly 80% of the dollar

debt in China is on

short-term maturities

 EMEs balance sheets in

red due to the economic

contraction & recession

What will happen:

Global debt crisis coming soon???

 According to The Bank for International Settlement (BIS):

 The global financial system remains anchored to US borrowing

rate

 Fed raises interest rate

 higher borrowing cost & EMEs may face a monetary shock

9-24

Summary

• The Fed’s rate rise could exacerbate the

EM currency turmoil, and even help

precipitate a full-blown crisis.

• An increase in Fed’s interest rate can trigger

a global debt crisis in the near future.