[This article was contributed by Dr. Imran Khalid, a freelance writer based in Karachi, Pakistan. He was qualified as a physician from Dow Medical University in Karachi in 1991, and has a master's degree in international relations from Karachi University.]
KARACHI -- The incessant procession of interest rate hikes by the U.S. Federal Reserve has aggravated the myriad challenges facing the global economy, particularly emerging nations are expected to face the brunt of the burden.
Since March 2022, the Fed has executed a continuous upward march, pushing rates higher on 11 consecutive occasions. This monetary tightening has interest rates perched at their loftiest point in nearly two decades, settling within a range spanning from 5.25 percent to 5.50 percent.
The recent spike in the yield of the U.S. 10-year Treasury bond, with its far-reaching consequences, has particularly cast a pall of uncertainty over the prospects for international economic growth, placing the spotlight on developing nations as they grapple with a host of daunting challenges that threaten their stability and expansion.
The escalation in yields on U.S. bonds paves the way for an ever-widening chasm in interest rates between American bonds and those of other nations. At the same time, the momentum of the U.S. dollar exchange rate is gaining traction, foreshadowing a development that might initially seem localized but carries the potential to rapidly evolve into a global challenge.
The reverberations of this shift ripple are being felt across the globe. The emerging economies, often marked by their inherent fragility in the face of external upheaval, now confront a formidable dual-threat – the surge in U.S. bond yields and the concurrent fortification of the U.S. dollar. This unholy alliance of forces ushers in a dire amalgamation of troubles, giving rise to a host of challenges for these developing countries.
The sharp rise in U.S. bond yields sparks a significant increase in the costs related to debt servicing for countries burdened with U.S. dollar-denominated obligations. An array of emerging economies hinges on debt denominated in foreign currencies, and as the dollar strengthens, the weight of repaying these liabilities will grow ever more burdensome. This will create a precarious scenario where the fiscal allocations of governments in these nations are forced to devote a considerable share of their budgets to debt servicing, a shift that diverts resources away from vital social and economic development initiatives.
The stronger U.S. dollar, exacerbated by rising bond yields, has a direct impact on the cost of imports for emerging economies. As their currencies depreciate against the dollar, the prices of imported goods and commodities increase, leading to inflationary pressures. This can erode the purchasing power of citizens and create a volatile economic environment.
The global financial system is interconnected, and the U.S. bond market serves as a benchmark for interest rates worldwide. The escalating strength of the U.S. dollar, compounded by the surge in bond yields, will cause a direct and unforgiving blow to the import costs borne by emerging economies. As their own currencies depreciate in the face of the dollar's ascendancy, the prices of imported goods and essential commodities will invariably surge, thrusting these nations into the throes of inflationary turbulence. The result is a perilous terrain where the purchasing power wanes and the economic landscape becomes a volatile expanse.
It is essential to bear in mind that in our intricately interconnected global financial ecosystem, the U.S. bond market occupies a central role, exerting a profound impact on interest rates across the globe. When U.S. bond yields rise, it sets off a chain reaction, causing borrowing costs to increase across the globe. One of the most immediate and direct consequences of the rise in U.S. bond yields is the exodus of capital from emerging markets. Investors, attracted by the higher returns offered by U.S. bonds, are quick to withdraw their investments from these countries.
This capital flight can lead to severe liquidity crises and a depletion of foreign exchange reserves, leaving these economies vulnerable to external shocks. As U.S. bond yields experience an upsurge, a domino effect is set into motion, causing a ripple of escalating borrowing costs that extends across the globe. For emerging economies that rely on international capital markets for financing, this translates into higher borrowing costs, making it more challenging for them to access the funds needed for development and infrastructure projects.
One of the most immediate and unswerving consequences of this surge in U.S. bond yields is the expected exodus of capital from these developing markets. Investors, enticed by the superior returns promised by U.S. bonds, would hastily withdraw their investments from these nations. This flight of capital can usher in severe liquidity crises and a depletion of foreign exchange reserves, leaving these economies precariously exposed to external shocks and disruptions. For example, Egypt was harmed by the U.S. monetary policies, which have caused the fleeing of more than 20 billion U.S. dollars in investments in government debt from Egypt.
The international ratings agency Moody's has cautioned about the global unsettling due to the abrupt rise in the 10-year U.S. Treasury yield which has shaken people's confidence in the U.S. economy and may cause the U.S. economic expansion to go off track. This sentiment further exacerbates the challenges faced by developing nations, as the global economic landscape becomes increasingly uncertain.
The impact of rising U.S. bond yields on emerging economies is not a new phenomenon, but it has been amplified in recent years. This confluence of economic challenges has left these nations with limited room to maneuver and adapt. While the United States may have its own rationale for raising bond yields, it is imperative to grasp the reverberations this sends across the global economic spectrum, especially for countries struggling with the formidable specters of poverty, instability, and underdevelopment.
Against this backdrop, International financial institutions, such as the International Monetary Fund (IMF), can play a crucial role in providing financial support and expertise to countries facing external economic challenges. This support can help stabilize their economies and prevent crises. Developing countries burdened with high levels of debt should be offered debt relief or restructuring options to make their financial obligations more manageable. This can alleviate the pressure on their budgets and free up resources for critical domestic needs. Emerging economies should work on diversifying their sources of financing and reduce their dependence on foreign-currency-denominated debt.
Exploring alternative funding options, such as partnerships with other countries or institutions, can help mitigate the impact of U.S. bond yield fluctuations. While the ascent of U.S. bond yields may ostensibly mirror the internal dynamics of the American economy, it is important to analyze the intricate web of global interconnectedness within the economic framework.
What transpires in one nook of the world has the potential for profound repercussions across the globe, particularly for the world's most susceptible nations. The recent upswing in U.S. bond yields should act as a clarion call for policymakers, compelling them to contemplate the sweeping consequences of their choices on the international stage.
reporter
Park Sae-jin
swatchsjp@ajunews.com
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