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 신천의 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 in EMEs Russia  The largest country in the world and the 5th largest economy  In 2014, following military intervention in Ukraine, prospects for economic growth declined further The recent economic performance in EMEs South Africa  Advanced 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? 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  The slowdown in Chinese economy & EMEs as well  Falling Commodity Prices  Slowing Global Demand 9-13 4- How does the global market affect the Fed’s decision  The slowdown in Chinese economy & EMEs as well  The stock market turmoil (fluctuated wildly) 9-14 4- How does the global market affect the Fed’s decision  The slowdown in Chinese economy & EMEs as well  China devalued Yuan against $ to boost the export 9-15 4- How does the global market affect the Fed’s decision  Falling Commodity Prices: because of slowing Chinese & global demand for Commodity  US inflation rate 9-16 4- How does the global market affect the Fed’s decision  Falling Global Demand  Brazilian & Russian Economies Fall into Deep Recession  Euro Zone is still struggling to get out of deflation 9-17 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  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 Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-19 Capital flows to EMEs Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-20 5-2 Triggering global debt crisis  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 Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-21 High debt in both advanced economies and EMEs Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-22 5-2 Triggering global debt crisis  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 shortterm maturities  EMEs balance sheets in red due to the economic contraction & recession Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-23 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 [...]...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... 4- How does the global market affect the Fed’s decision  The slowdown in Chinese economy & EMEs as well  China devalued Yuan against $ to boost the export 9-15 4- How does the global market affect the Fed’s decision  Falling Commodity Prices: because of slowing Chinese & global demand for Commodity  US inflation rate 9-16 4- How does the global market affect the Fed’s decision  Falling Global Demand... 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  The slowdown in Chinese economy & EMEs as well  Falling Commodity Prices  Slowing Global Demand 9-13 4- How does the global market affect the Fed’s decision  The slowdown in Chinese economy & EMEs as well  The stock market turmoil (fluctuated... 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... 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 shortterm maturities  EMEs balance sheets in red due to the economic contraction & recession Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-23 What will happen: Global debt crisis coming... safest investment vehicles  The recovery of US economy Higher interest rate  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 Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-19 Capital flows to EMEs Copyright © 2008 Pearson Addison-Wesley... 5-2 Triggering global debt crisis  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 Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-21 High debt in both advanced economies and EMEs Copyright © 2008 Pearson Addison-Wesley All rights reserved 9-22 5-2 Triggering global... Russian Economies Fall into Deep Recession  Euro Zone is still struggling to get out of deflation 9-17 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. .. 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 ... 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... 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... 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