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.
Meghan%20podcast
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500 People from Gaza enter France
115 Special programme for artists
25 Evacuation of injured and sick
Match info
Uefa Champions League Group H
Manchester United v Young Boys, Tuesday, midnight (UAE)
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ADCC AFC Women’s Champions League Group A fixtures
October 3: v Wuhan Jiangda Women’s FC
October 6: v Hyundai Steel Red Angels Women’s FC
October 9: v Sabah FA
The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
Torque: 859Nm
Transmission: Single-speed automatic
Price: From Dh825,900
On sale: Now
Labour dispute
The insured employee may still file an ILOE claim even if a labour dispute is ongoing post termination, but the insurer may suspend or reject payment, until the courts resolve the dispute, especially if the reason for termination is contested. The outcome of the labour court proceedings can directly affect eligibility.
- Abdullah Ishnaneh, Partner, BSA Law
Dubai World Cup factbox
Most wins by a trainer: Godolphin’s Saeed bin Suroor(9)
Most wins by a jockey: Jerry Bailey(4)
Most wins by an owner: Godolphin(9)
Most wins by a horse: Godolphin’s Thunder Snow(2)
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If you go
Flight connections to Ulaanbaatar are available through a variety of hubs, including Seoul and Beijing, with airlines including Mongolian Airlines and Korean Air. While some nationalities, such as Americans, don’t need a tourist visa for Mongolia, others, including UAE citizens, can obtain a visa on arrival, while others including UK citizens, need to obtain a visa in advance. Contact the Mongolian Embassy in the UAE for more information.
Nomadic Road offers expedition-style trips to Mongolia in January and August, and other destinations during most other months. Its nine-day August 2020 Mongolia trip will cost from $5,250 per person based on two sharing, including airport transfers, two nights’ hotel accommodation in Ulaanbaatar, vehicle rental, fuel, third party vehicle liability insurance, the services of a guide and support team, accommodation, food and entrance fees; nomadicroad.com
A fully guided three-day, two-night itinerary at Three Camel Lodge costs from $2,420 per person based on two sharing, including airport transfers, accommodation, meals and excursions including the Yol Valley and Flaming Cliffs. A return internal flight from Ulaanbaatar to Dalanzadgad costs $300 per person and the flight takes 90 minutes each way; threecamellodge.com
UAE currency: the story behind the money in your pockets
Day 4, Abu Dhabi Test: At a glance
Moment of the day Not much was expected – on Sunday or ever – of Hasan Ali as a batsman. And yet he lit up the late overs of the Pakistan innings with a happy cameo of 29 from 25 balls. The highlight was when he launched a six right on top of the netting above the Pakistan players’ viewing area. He was out next ball.
Stat of the day – 1,358 There were 1,358 days between Haris Sohail’s previous first-class match and his Test debut for Pakistan. The lack of practice in the multi-day format did not show, though, as the left-hander made an assured half-century to guide his side through a potentially damaging collapse.
The verdict As is the fashion of Test matches in this country, the draw feels like a dead-cert, before a clatter of wickets on the fourth afternoon puts either side on red alert. With Yasir Shah finding prodigious turn now, Pakistan will be confident of bowling Sri Lanka out. Whether they have enough time to do so and chase the runs required remains to be seen.
Electoral College Victory
Trump has so far secured 295 Electoral College votes, according to the Associated Press, exceeding the 270 needed to win. Only Nevada and Arizona remain to be called, and both swing states are leaning Republican. Trump swept all five remaining swing states, North Carolina, Georgia, Pennsylvania, Michigan and Wisconsin, sealing his path to victory and giving him a strong mandate.
Popular Vote Tally
The count is ongoing, but Trump currently leads with nearly 51 per cent of the popular vote to Harris’s 47.6 per cent. Trump has over 72.2 million votes, while Harris trails with approximately 67.4 million.
Killing of Qassem Suleimani
Jetour T1 specs
Engine: 2-litre turbocharged
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How to apply for a drone permit
- Individuals must register on UAE Drone app or website using their UAE Pass
- Add all their personal details, including name, nationality, passport number, Emiratis ID, email and phone number
- Upload the training certificate from a centre accredited by the GCAA
- Submit their request
What are the regulations?
- Fly it within visual line of sight
- Never over populated areas
- Ensure maximum flying height of 400 feet (122 metres) above ground level is not crossed
- Users must avoid flying over restricted areas listed on the UAE Drone app
- Only fly the drone during the day, and never at night
- Should have a live feed of the drone flight
- Drones must weigh 5 kg or less
Tearful appearance
Chancellor Rachel Reeves set markets on edge as she appeared visibly distraught in parliament on Wednesday.
Legislative setbacks for the government have blown a new hole in the budgetary calculations at a time when the deficit is stubbornly large and the economy is struggling to grow.
She appeared with Keir Starmer on Thursday and the pair embraced, but he had failed to give her his backing as she cried a day earlier.
A spokesman said her upset demeanour was due to a personal matter.
Essentials
The flights
Emirates and Etihad fly direct from the UAE to Los Angeles, from Dh4,975 return, including taxes. The flight time is 16 hours. Alaska Airlines, United Airlines, Delta Air Lines, Aeromexico and Southwest all fly direct from Los Angeles to San Jose del Cabo from Dh1,243 return, including taxes. The flight time is two-and-a-half hours.
The trip
Lindblad Expeditions National Geographic’s eight-day Whales Wilderness itinerary costs from US$6,190 (Dh22,736) per person, twin share, including meals, accommodation and excursions, with departures in March and April 2018.
More from Rashmee Roshan Lall
NO OTHER LAND
Director: Basel Adra, Yuval Abraham, Rachel Szor, Hamdan Ballal
Stars: Basel Adra, Yuval Abraham
Rating: 3.5/5
What the law says
Micro-retirement is not a recognised concept or employment status under Federal Decree Law No. 33 of 2021 on the Regulation of Labour Relations (as amended) (UAE Labour Law). As such, it reflects a voluntary work-life balance practice, rather than a recognised legal employment category, according to Dilini Loku, senior associate for law firm Gateley Middle East.
“Some companies may offer formal sabbatical policies or career break programmes; however, beyond such arrangements, there is no automatic right or statutory entitlement to extended breaks,” she explains.
“Any leave taken beyond statutory entitlements, such as annual leave, is typically regarded as unpaid leave in accordance with Article 33 of the UAE Labour Law. While employees may legally take unpaid leave, such requests are subject to the employer’s discretion and require approval.”
If an employee resigns to pursue micro-retirement, the employment contract is terminated, and the employer is under no legal obligation to rehire the employee in the future unless specific contractual agreements are in place (such as return-to-work arrangements), which are generally uncommon, Ms Loku adds.
How much do leading UAE’s UK curriculum schools charge for Year 6?
- Nord Anglia International School (Dubai) – Dh85,032
- Kings School Al Barsha (Dubai) – Dh71,905
- Brighton College Abu Dhabi - Dh68,560
- Jumeirah English Speaking School (Dubai) – Dh59,728
- Gems Wellington International School – Dubai Branch – Dh58,488
- The British School Al Khubairat (Abu Dhabi) - Dh54,170
- Dubai English Speaking School – Dh51,269
*Annual tuition fees covering the 2024/2025 academic year
The specs
Engine: 4.0-litre V8 twin-turbocharged and three electric motors
Power: Combined output 920hp
Torque: 730Nm at 4,000-7,000rpm
Transmission: 8-speed dual-clutch automatic
Fuel consumption: 11.2L/100km
On sale: Now, deliveries expected later in 2025
Price: expected to start at Dh1,432,000
Miss Granny
Director: Joyce Bernal
Starring: Sarah Geronimo, James Reid, Xian Lim, Nova Villa
3/5
(Tagalog with Eng/Ar subtitles)
Dhadak 2
Director: Shazia Iqbal
Starring: Siddhant Chaturvedi, Triptii Dimri
Rating: 1/5
Dubai World Cup Carnival card
6.30pm: UAE 1000 Guineas Trial Conditions (TB) US$100,000 (Dirt) 1,400m
7.05pm: Handicap (TB) $135,000 (Turf) 1,000m
7.40pm: Handicap (TB) $175,000 (D) 1,900m
8.15pm: Meydan Challenge Listed Handicap (TB) $175,000 (T) 1,400m
8.50pm: Dubai Stakes Group 3 (TB) $200,000 (D) 1,200m
9.25pm: Dubai Racing Club Classic Listed Handicap (TB) $175,000 (T) 2,410m
The National selections
6.30pm: Final Song
7.05pm: Pocket Dynamo
7.40pm: Dubai Icon
8.15pm: Dubai Legacy
8.50pm: Drafted
9.25pm: Lucius Tiberius
A State of Passion
Directors: Carol Mansour and Muna Khalidi
Stars: Dr Ghassan Abu-Sittah
Rating: 4/5
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Sole survivors
- Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
- George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
- Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
- Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
