A further rise in the US dollar as the monetary policy gap between the United States and other major economies widens could have a significant negative impact on other countries, the International Monetary Fund warned.
In its annual spillovers report, the IMF said lower oil prices, more monetary stimulus in the eurozone and Japan and expectations for interest rate rises in the United States and Britain created a “spillover-rich” environment, Reuters reported.
Although so far there were few signs of stress among emerging markets, which have suffered from capital outflows and currency weakness in past episodes of dollar strength, high debt levels could still create problems.
Advanced economies are not immune from spillover risks. An expected rise in US interest rates, a move economists expect in September, could not only drive the dollar higher against the euro but also push up eurozone interest rates, the report said.
And asset purchases in the eurozone might put downward pressure on US long-term yields, undermining any attempt by the US Federal Reserve to pull back stimulus.
The IMF report said spillovers from the eurozone to the United States had been “particularly large” since early 2014.
Emerging markets’ vulnerability was more acute in cases of high gross debt with a high share of foreign currency obligations, the report said, pointing to potential problems in Chile, Hungary, Malaysia, Poland, Turkey and Thailand. Corporate debt levels would be a problem for other countries if conditions worsened.
Stress tests, assuming a 30% depreciation of the local currency against the dollar, a 15% against the euro, a 30% rise in borrowing costs and a 20% decline in earnings, showed debt at risk could rise above two-thirds of total corporate debt in Bulgaria and Hungary. Debt at risk across the total sample of 15 countries could increase by $290 billion, and account for 34% of total corporate debt compared with 28% in 2013, the scenario showed, according to a staff note released with the report.
