Analysis: Growth, investment at risk from emerging markets rate hikes

Thu Jan 30, 2014 12:52pm EST
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By Sujata Rao

LONDON (Reuters) - A growth-crushing downward spiral looks imminent for emerging markets, threatening to turn back the tide of foreign investment that flooded into developing countries on the premise of fast economic expansion.

Countries in Asia, Latin America and emerging Europe are being forced to raise interest rates sharply to stave off currency collapses and a wholesale exodus of foreign investors. Turkey, India and South Africa jacked up rates this week, heaping pressure on others to follow suit.

Whether these steps will steady the currencies is unclear, but one thing is sure - economic growth, developing countries' main trump card over their richer peers, will take a hit.

Analysts reckon Turkey's dramatic 425 basis point rate hike could almost halve this year's growth rate, to 1.7-1.9 percent, for example, while the South African Reserve Bank, which raised by half a point, cut its estimates for 2014 and 2015 growth.

Indonesia's economy last year probably grew at its slowest pace in four years, below its long-term average of above 6 percent, after 175 bps in policy tightening since June.

Even before the latest increases in borrowing costs, developing country growth rates were under the cosh.

Not only was the developing world's 4.7 percent growth last year almost a full percentage point under International Monetary Fund forecasts, its premium over growth rates in advanced countries has shrunk to its lowest in a decade.

In Brazil and Russia, growth is running below the levels forecast for Britain and the United States in 2014.   Continued...

People walk past a currency exchange board showing rouble exchange rates in Moscow January 30, 2014. REUTERS/Maxim Shemetov