By Isaac Cohen*
On the verge of another interest rate hike in the United States, by the Federal Reserve, several major emerging market economies are experiencing financial instability, as a consequence of a stronger dollar and capital flight. A stronger dollar makes more vulnerable those governments and companies which borrowed in dollars, because more local currency is required to service their dollar denominated debt. Additionally, higher US interest rates decrease the attractiveness of those relatively better yields sought by investors in emerging markets.
The present situation reminds what happened in 2013, during the so-called “temper tantrum.” Then, the announcement by Federal Reserve Chairman Ben Bernanke of a decrease in asset purchases, by the US central bank, led to turbulence and instability in several emerging markets. In those days, there were “five fragile” emerging economies, Brazil, India, Indonesia, South Africa and Turkey. Today, Argentina, Brazil, Indonesia, South Africa and Turkey are again experiencing financial instability, in the form of local stock market drops, increased interest rates and currency depreciation. Also, Argentina and the International Monetary Fund have reached a Stand-By agreement, to support an economic plan to confront the turbulence.
Once again, these emergent economies are confronting what is known as the Mundell-Fleming “trilemma,” or the “impossible trinity,” of maintaining free capital flows, exchange rate targets and an independent monetary policy.
*International analyst and consultant, former Director ECLAC Washington. Commentator on economic and financial issues for CNN en Español TV and radio, UNIVISION, TELEMUNDO and other media.
