As the Federal Reserve embraces a wait-and-see approach towards interest rate reductions, emerging markets are left with little choice but to tailor their own policy decisions based on the Fed's actions and messaging.
The US central bank last week downgraded its interest rate projection to just a quarter-of-a-percentage point cut this year. By the time the Fed is ready to cut rates, other developed economies like the European Central Bank and Bank of Canada will already be well under way.
“That means the Fed is going to be higher for longer and probably one of the last major central banks to start cutting rates,” said Paul Gruenwald, chief global economist at S&P.
This divergence is unlike what financial markets saw in 2021 and 2022, when central banks more or less acted in synchronicity to aggressively raise interest rates in response to a global surge in inflation.
Now, the Fed is set to keep rates steady for at least several more months.
That delay is already postponing many emerging markets' plans to cut rates as well, and not just oil exporters like the UAE and other GCC countries whose currencies are pegged to the dollar. Emerging markets in the Asia Pacific region are also holding off for now, for fear of moving before the Fed.
Meanwhile, central banks in Sweden, Switzerland, Brazil and Mexico have already begun cutting rates, leading to what Mr Gruenwald calls a “disjointed cutting cycle”.
“It looks like we're going to be going down at different paces. And that's just a reflection of another theme we've been pointing to which is US outperformance,” he told The National.
A slower path
Economists and traders are already pencilling in delayed projections for when emerging markets can reduce rates due to the Fed's own delay.
Most emerging markets tend to fare better in an environment with lower interest rates and a weaker US dollar.
But with the Fed now in higher-for-longer territory, these economies are forced to navigate through higher exchange rates and higher debt levels.
It could also lead to higher capital outflows, as investors pulling capital from emerging markets could weaken economic activity and add to their financial vulnerability.
In the Asia-Pacific region, Mr Gruenwald said central banks are wary of “getting ahead of the Fed” because it could ramp up capital outflows and weaken their currencies.
“They don't want a quick withdrawal of capital. I mean, those can be destabilising,” he said.
This concern led Indonesia to raise interest rates in order to strengthen the rupiah's exchange rate stability. The central bank's governor called this a “pre-emptive” move.
Meanwhile, Latin and South American economies are nearing the end of normalising monetary policy. But the central bank governors of Brazil and Mexico, who responded to the 2022 inflation surge quicker than the Fed, now have to slow their decisions until the Fed acts.
“That kind of illustrates the difficulty for these countries,” said Maury Obstfeld, a senior fellow at the Peterson Institute for International Economics think tank in Washington.
Lowering rates at a time when the Fed adopts a higher-for-longer mindset places more pressure on these countries because, as their currencies depreciate it puts more pressure on inflation.
“I think it becomes a lot harder for them to cut when the Fed is not cutting,” Mr Obstfeld said.
“And what we'll see is sort of a slower pace of interest rate reductions from those economies, until the Fed signals strongly that it's cutting in the near future,” he said.
Banxico, which closely monitors the Fed's decisions to avoid capital outflows, is expected to pause rate reductions after beginning in March. The central bank has insisted its decisions are independent of the Fed's.
Even as they remain wary of the spillovers from the Fed's decisions, many central banks in advanced emerging markets are less vulnerable today than in previous restricting cycles.
“Their central banks really did good jobs in not falling behind the curve. And I think this has served them well as the Fed or the ECB went into their hiking cycles, which … put a lot of stress on these economies.” Mr Obstfeld said.
“It did put stress on them, but we didn't get any large scale debt crises apart from lower income countries.”
Low-income countries to face biggest pressure
While emerging markets may not be as vulnerable to the Fed's decisions like in years past, low-income countries saddled with debt continue to face pressure.
“I don't think it's something that creates an immediate crisis, but it increases pressures on them that they're already feeling,” Mr Obstfeld said.
Low-income markets are typically vulnerable to interest-rate increases, but the global rate hiking cycle in 2022 caused their debt burdens to soar.
More than half of low-income countries face high risk of debt distress, and roughly one-fifth have sovereign bonds trading at distressed levels, the International Monetary Fund reported last year.
Among those facing debt crises are Egypt, Morocco, Lebanon, Pakistan, Tunisia and Zambia.
In the case of Egypt, Cairo's central bank announced a series of austerity measures to help secure an $8 billion loan from the IMF in March. That followed a previous investment from the UAE, as part of a $35 billion deal signed with a consortium led by Abu Dhabi's investment holding firm ADQ.
Egypt is just one example of an emerging market waiting for lower interest rates. Lower US rates would weaken the dollar's value against the Egyptian pound, theoretically boosting economic growth a consumers are able to purchase more.
The IMF noted that some progress had been made by countries like Zambia and Nigeria to build economic resilience, but warned many are still falling behind.
“It may be a sort of slow moving process as the interest charges build up, but it's definitely not a favourable development for them, not a favourable environment,” Mr Obstfeld said.
'A short sleep'
The Fed's slower path to rate cuts plays out differently among oil-importers, whose currencies are pegged to the dollar.
Zubair Iqbal, a non-resident scholar at the Middle East Institute think tank, explained that interest rates in GCC countries tend to fall when the market-setting Federal Reserve reduces rates in the US.
“And the reason, very simply the following, the central banks in these countries tend to determine the rates according to what the market rate is to be used on, and therefore interest rates are adjusted in order to make sure that happens,” he said.
Mr Iqbal said that because these oil-exporting countries have the lower and upper bound rates tied to the dollar – which in the US is currently 5.25 and 5.50 per cent, respectively – they are protected from a scenario in which there is a destabilising flow of funds.
“It's like waking up from a short sleep. Nothing happens,” he said.
And with the region facing economic uncertainty because of potential spillover effects from the Gaza war, trade disruptions, one quarter-rate cut this year will likely have a minimal impact even for low-income countries that are dollar-pegged.
When interest rates fall, it typically eases some of the debt service burden countries face as it allows more room for countries to borrow. But that is not the case for economies impacted by the war in Gaza, Mr Iqbar said, because they will not be in the market to borrow.
“In any case, they will be restraining their spending to adjust to the crisis situation. Little consequences would be attributable to the US interest rate policy,” he said.
The specs
- Engine: 3.9-litre twin-turbo V8
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- Torque: 760nm
- On sale: 2026
- Price: Not announced yet
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UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
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Global Fungi Facts
• Scientists estimate there could be as many as 3 million fungal species globally
• Only about 160,000 have been officially described leaving around 90% undiscovered
• Fungi account for roughly 90% of Earth's unknown biodiversity
• Forest fungi help tackle climate change, absorbing up to 36% of global fossil fuel emissions annually and storing around 5 billion tonnes of carbon in the planet's topsoil
Premier League results
Saturday
Crystal Palace 1 Brighton & Hove Albion 2
Cardiff City 2 West Ham United 0
Huddersfield Town 0 Bournemouth 2
Leicester City 3 Fulham 1
Newcastle United 3 Everton 2
Southampton 2 Tottenham Hotspur 1
Manchester City 3 Watford 1
Sunday
Liverpool 4 Burnley 2
Chelsea 1 Wolverhampton Wanderers 1
Arsenal 2 Manchester United 0
Test
Director: S Sashikanth
Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan
Star rating: 2/5
The specs
Engine: Two permanent-magnet synchronous AC motors
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On sale: now
Pharaoh's curse
British aristocrat Lord Carnarvon, who funded the expedition to find the Tutankhamun tomb, died in a Cairo hotel four months after the crypt was opened.
He had been in poor health for many years after a car crash, and a mosquito bite made worse by a shaving cut led to blood poisoning and pneumonia.
Reports at the time said Lord Carnarvon suffered from “pain as the inflammation affected the nasal passages and eyes”.
Decades later, scientists contended he had died of aspergillosis after inhaling spores of the fungus aspergillus in the tomb, which can lie dormant for months. The fact several others who entered were also found dead withiin a short time led to the myth of the curse.
Where to buy
Limited-edition art prints of The Sofa Series: Sultani can be acquired from Reem El Mutwalli at www.reemelmutwalli.com
Dust and sand storms compared
Sand storm
- Particle size: Larger, heavier sand grains
- Visibility: Often dramatic with thick "walls" of sand
- Duration: Short-lived, typically localised
- Travel distance: Limited
- Source: Open desert areas with strong winds
Dust storm
- Particle size: Much finer, lightweight particles
- Visibility: Hazy skies but less intense
- Duration: Can linger for days
- Travel distance: Long-range, up to thousands of kilometres
- Source: Can be carried from distant regions
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Killing of Qassem Suleimani
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
UAE currency: the story behind the money in your pockets
F1 The Movie
Starring: Brad Pitt, Damson Idris, Kerry Condon, Javier Bardem
Director: Joseph Kosinski
Rating: 4/5
Prophets of Rage
(Fantasy Records)
Our family matters legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
The specs: 2018 Maxus T60
Price, base / as tested: Dh48,000
Engine: 2.4-litre four-cylinder
Power: 136hp @ 1,600rpm
Torque: 360Nm @ 1,600 rpm
Transmission: Five-speed manual
Fuel consumption, combined: 9.1L / 100km
Election pledges on migration
CDU: "Now is the time to control the German borders and enforce strict border rejections"
SPD: "Border closures and blanket rejections at internal borders contradict the spirit of a common area of freedom"
