The Economy

Outlook for Emerging Markets Stays Sour

Emerging markets disappoint because of strong Dollar, low commodities prices, and tha prospect of a Fed interest rate increase.
Katie Kuehner-HebertJune 11, 2015

Emerging markets are set for a rockier time this year – starkly different than just a few years ago when the U.S. dollar was weak, interest rates were near zero, and commodity prices were still high.

Developing countries are bracing for a fourth consecutive year of “disappointing” economic growth this year,  stemming from expected higher borrowing costs resulting from low prices for oil and other key commodities, according to World Bank’s latest 2015 “Global Economic Prospects” report, which was released Wednesday. Developing countries are now projected to grow by 4.4% this year, with a likely rise to 5.2% in 2016, and 5.4% in 2017.

“Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment,” World Bank president Jim Yong Kim said in a press release announcing the report.”

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A CNNMoney article on Wednesday said the World Bank’s report jibes with the concerns of other organizations, including the U.S. Federal Reserve, whose board debated the negative affect of a Fed rate hike on emerging markets at its last meeting.

If the Fed hikes rates comes September, investors could flee from emerging markets, according to the article. The situation could be compounded by problems caused by the strong U.S. dollar and low commodity prices due largely to China’s slowdown and a lack of demand.

A March CNNMoney article said that the dollar’s rapid rally, currency woes and political problems in emerging countries were dampening investment there. According to the Institute of International Finance, investors only put $16 billion into emerging market stocks and bonds in March, compared to an average $22 billion investment per month.

Another CNNMoney article in April said that China’s economy grew at its slowest pace since 2009 in the first quarter, with its gross domestic product expanding by 7%, compared to an expansion rate of 7.3% in the fourth quarter of 2014.

A perfect storm could hit emerging markets in the fall if the Fed raises rates in September, CNNMoney said Wednesday.

“It would increase borrowing costs — interest on loans — for companies in emerging markets,” CNNMoney wrote. “And it would make American debt more attractive to investors, meaning emerging market debt could see a selloff.”