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Vote for expectations: developing countries are threatened by US inflation

While policymakers in developing countries are battling the spread of coronavirus infection, they are also facing economic risks – not just at home.

Economic growth in high inflation, particularly in the US, is causing rising inflation. This increases yields, which in turn makes it cheaper for other countries to sell loans as consumers need higher returns.

What should be good news – the onset of global recovery – has been alarming: that mortgage rates will be severely compromised in countries such as South Africa and Brazil, and they will throw away their already depleted public spending.

Breaking: What’s the New Season?

Prices are rising in many countries. FT checks if inflation has returned.

DAY 1: The development economy has not experienced the downturn in many years. Is this about to change?

DAY TWO: International cooperation between investors on how to promote economic and social stability is ruined.

DAY 3: Canary in US coal mines: consumer vehicles.

Day 4: How the virus was disturbed financial statistics

Day 5: Why inflation in developing countries is a problem for developing nations.

Tatiana Lysenko, chief marketing officer at the forthcoming S&P Global Ratings market, said: “The emerging economy should be more concerned with US inflation than their own.”

It is not that rising prices and rising yields in the US raise rental prices in developing countries, he said. At stake, obviously, is our commitment on the US economy, which will lead to an outflow of stocks and their bonds, which, in turn, will weaken the economy.

Although rich countries were able to borrow during the epidemic at very low prices, many developing countries are already experiencing very high economic costs.

Data from the S&P shows that inflationary spending on 15 of the 18 most developed economies has fallen below the full borrowing rate by more. Most pay 1% installment. An increase of 1 percent inflation makes it easier for many to endure.

The same is true in developing lands. Egypt, which is expected to repay a debt equivalent to 38% of total sales this year, is paying an average of 12.1%, more than its price of 11.8%, according to S&P. Ghana pays 15%, compared to an average of 11.5%.

Dangers do not exist on very high prices. Brazil rebounded 4.7% this year, compared to the previous quarter. But it did so by selling bonds that needed to be repaid faster than before.

This reflects the years of service in which Brazil sold long-term debt and paid off to keep its finances stable. Last year the median maturity of the new loan was two years, down from five in 2019.

Brazil needs to restructure its debt equivalent to 13% of GDP this year – a lower share compared to smaller countries, but more money, and could be offset by rising prices or a slower recovery than expected.

Its central bank has already raised prices twice this year to address price problems after inflation rose 2.25 to 5.25%. Another increase is taking place at the next meeting later this month, with a clear 5.5% increase at the end of the year, from a record low of 2% in March.

The bar chart for% shows that central banks have no choice but to raise prices

Brazil is a clear example of how rising prices and rising productivity threaten debt stability, says William Jackson of Capital Economics. “Growth in the economy, inflation is rising and the central bank is raising prices, which is wasting money on credit.”

South Africa is in the same group, he said, with the exception of Egypt and others with significant inflationary needs.

There are limitations. For example, Brazil, South Africa and India all rely more on home lenders than on foreign ones. This puts them at greater financial risk than they did during the crisis of the late 20th century.

India in particular has turned to a domestic bank to offer a ten-year loan at prices above 6%. He also borrowed a short period of time during the epidemic, although its low interest rate this year – equivalent to 3.3% of GDP – makes it vulnerable to inflation.

But William Foster, vice-president of an independent group at Moody’s Investors Service, said India’s economic woes were being left behind by debt and not government funding to help fight the epidemic.

Bar chart of average rate of refinancing (2021 year to date,%) showing rising payroll

“India has a lot of money and a lot of debt,” he said. “The most important thing in debt consolidation is that we will achieve a fixed amount of time, through adjustments and other means to get business finances that we haven’t seen in years.”

If, as many policymakers expect, this year’s inflation could be temporary, the interest rate of developing countries should not go too far.

Roberto Campos Neto, governor of the central bank in Brazil, told a conference this week that the issue is whether inflation is short-lived and justified by growth, or whether central banks need to raise prices further. “The first case is good for the country to come,” he said. The second is not. ”

Food and commodity prices are already rising at a rate that consumes consumer confidence, Lysenko said. If interest rates rise sharply, reducing the growing debt debt – and increasing growth – becomes more difficult.

“In a interconnected country that has a lot of money, the US crop has the necessary spillovers,” he said. “It’s too early [for emerging markets] strengthening [monetary policy], doing so now would weaken their recovery. But some countries may not have much space to cover. ”

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