Emerging markets face the prospect of years of higher-than-expected interest rates that could imperil debt sustainability in some countries, Brazil’s central bank governor Roberto Campos has warned.
In an interview with LatinFinance, Campos said that a deteriorating fiscal situation in advanced economies, in particular the US, was having an adverse impact on Treasury yields and has caused borrowing costs for developing economies to soar — a fact he cautioned was likely to cast a pall for longer than many market observers expect.
“You have the fiscal situation of some advanced economies that has worsened, and now you are starting to see the effect on debt, on the long yields of interest rates in some of these countries,” he said on the sidelines of the World Bank/IMF annual meeting in Morocco.
US consumer price inflation for September showed headline prices rose 0.4% month-on-month and 3.7% year-on-year, above consensus estimates. The 10-year Treasury rate meanwhile nudged 4.7% Friday, compared to a long-term average of 4.25%.
The question is how long emerging economies can sustain yields at this rate, he said, especially as highly-indebted rich countries draw capital away from developing markets.
“It is very important for us in emerging markets,” Campos said. “What that might mean for us is less liquidity in the future [since] some of these advanced economies will dry up some of the liquidity for us in emerging-market countries.”
He cautioned that the spillover effects could be far worse than anticipated, especially when coupled with a proliferation of international crises, including war in the Middle East and ongoing conflict in Ukraine. The consequence was likely to be higher interest rates for longer, he said, a fact which piles pressure even on sovereigns with multiple financing options.
“The main challenge right now globally is we have this disinflation process in place, but there are a lot of new challenges to the process. You have oil prices, you have food prices, the weather-related [phenomena], the fact that in some advanced economies the disinflation process might stall. And then you have a big problem that is connected to the geopolitical one,” Campos said.
This raises fresh challenges for emerging markets, including Brazil which has just assumed the rotating presidency of the G20 group of middle-income economies.
“We are looking how to deal with this and try to anticipate the problem,” Campos said. “I think this is what we’re going to be debating in the next couple of months.”
Campos meanwhile called for enhanced fiscal coordination between both emerging and developed economies, given what he sees as heightened risks to global financial stability.
“We do need coordination because what we are seeing is a very high level of debt, and high levels of debt with high interest rates, meaning that to roll over the debt we need to pay a lot,” Campos said. “That is going to have a crowding out effect on the private side of the debt and that would mean and less liquidity for everyone.”
In earlier comments, Campos had urged economic leaders in advanced economies to tackle the question of public debt head on. “We have a fiscal issue that we need to be more open about and talk more about the fiscal situation,” he said. “We have huge costs coming out of the pandemic and we need to talk, you know, how are we going to address this cost over the couple of the next couple of years without hurting the social tissue.”
“The lesson that I take home is the disinflation process globally is more difficult [than expected],” he said.
New issuance in Latin America has seen countries paying substantially more to issue sovereign debt.
Guatemala sold $565 million worth of 2032 bonds to yield 7.05% late last month, almost half a percentage point higher than a previous placement in June, when it issued $1 billion of 2036 notes to yield 6.6%.
This has led some sovereigns to look for alternatives to dollar borrowing. Paraguay, for instance, says it is also looking to “cheaper” sources of funding from other nations, including in the Gulf.