3 Ways The Fed Rate Increase Will Impact Emerging Markets

The Federal Reserve has a big impact on the U.S. stock market. It also affects the global financial market. As the dollar is a global currency, any changes in its valuation have a great impact on everything. Here are three ways it can impact emerging marketing.

Increase in corporate defaults

There ae many companies who took advantage of the low U.S. interest rates. They borrowed in dollars and repaid debt with a currency that is stronger. If there is an increase in U.S. interest rates then these companies will have a difficult time repaying their debts.

Lower foreign investment

The emerging market economies relied on the increase in foreign investment to drive their economic growth. If the interest rate becomes higher than the investors will move back to the U.S. and so there will be an outflow of capital from emerging markets. Due to low foreign investment, many economies will be affected.

Decrease in currency values

Due to low U.S. interest rates many emerging markets had appreciation in their currencies. For example, the USD/ZAR currency rose from less that 10.00 to 17.00. Because of this South Africa could leverage the currency valuation to take a loan from U.S to finance their growth initiatives. But if this rate falls, it will affect the South African market. It will hurt the investments.

As you can see that the Federal Reserve has a significant impact on both the domestic market and the international market as well. The emerging markets are vulnerable to the changes in interest rates.