Tag: market

  • The Importance of Financial Inclusion

    The Importance of Financial Inclusion

    Medium, small, and micro enterprises (MSMEs) make up 99% of total business in Malaysia. MSMEs also employ north of 7 million people, or, a staggering 65% of the employed population. 

     

    To quote SME Corporation Malaysia’s definition, “it refers to firms with sales turnover not exceeding RM20 million OR number of full-time employees not exceeding 75”.

    Another large sector of the Malaysian economy is the informal sector – characterised by economic activities outside legal purview – with an estimated 3.5 million workers. Because of the lack of formal arrangement, these workers do not enjoy benefits from law or social protection (insurance such as EPF SOCSO). 

    Examples of informal workers include domestic workers, street vendors, and even the self-employed. At the peak of the pandemic, among the most pressing economic issues was how MSMEs could be sustained when so few of them were digitised and consequently had to close-shop. In May 2020, Malaysia’s unemployment reached an all time high of 5.3%; a devastating period when suddenly, people found themselves without income but still with a houseful of mouths to feed. In 2020, although everyone faced a lockdown, not everyone felt it in equal magnitude; those already disadvantaged in pre-covid times and especially low-skilled or informal workers were the hardest hit.

    This is where financial inclusion enters – to ensure equitable development across all sectors and demographics.

    To quote the World Bank, the definition for financial inclusion is:

    “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”

    TLDR; without credit access, an agricultural business for example, would not be able to obtain loans for their seeds or fertilisers.

    Without banking service access (including financial literacy and infrastructure), individuals would have no savings for their child’s education or insurance to protect themselves in emergencies. Ultimately, this results in social inequalities being exacerbated as underprivileged groups miss out on resources for upward social mobility.

     

    The broadest, most at risk group would be the unbanked (unserved) and underbanked (underserved) in Malaysia – comprising around 12.5 million adults.

    Hence, the end-goal of financial inclusion is to not only reduce the number of unbanked or underbanked, but to also ensure that target, vulnerable groups remain resilient in the face of economic fluctuations, thus alleviating poverty.

    Promoting national financial inclusion is one of Bank Negara Malaysia’s (BNM) core functions.

    What BNM is doing:

     

    Digital Divide as the Ultimate Hurdle for Financial Inclusion

    Digital infrastructure is the most vital precondition for development in the present age. Without a digital device or internet access to online learning resources, students fall behind. Meanwhile, teachers get flooded with tasks that could’ve been streamlined by technology, eating into energy that could’ve been otherwise invested in their students.

    As schools become dilapidated, employment remains low or at a low-income, and the economic prospects of the area stagnate. Banks, the providers of financial credit, are the most capable of empowering economic activity here but, how come we don’t see more commercial banks setting up more branches in rural areas?

    Problems shared by both demand and supply sides for financial services in rural areas include: lack of financial literacy and of proof documents, as well as poor internet connectivity. Other supply-specific problems include; high costs of setting up and high default risks. Demand-specific problems include; a lack of confidence and the misuse of capital. These cascading issues can be traced back to the lack of digital infrastructure.

    Whilst Kuala Lumpur is a metropolitan capital, sadly, the rest of Malaysia couldn’t look more starkly different. For example, while the national average for broadband penetration is 127.1%, Sabah’s is only at 81.2%.

    (To read more on this issue, head to WikiImpact’s ‘Impact Sabah’)

    Hence, the issue of financial inclusion cannot be addressed in isolation but must also take into account the environmental factors of the most underserved demographics.

    This calls for a cohesive effort between major stakeholders in telecommunications, financial institutions, and city planning, lest we wish to see the rest of Malaysia to be left in the dust.

    To quote former BNM governor, Zeti Aziz, in her 2014 keynote address for AFI’s global policy forum:

    “Economic growth, no matter how stellar, will begin to fade when inequality sets in, and as income disparities widen.”

    And in a webinar for MIT Sloan in 2021:

    “There is (also) no shortcut solution for addressing rising inequalities … the responsibility of addressing inequality shouldn’t fall solely on the central bank. The central bank should interface with other agencies but establish clarity on who is responsible for what.”

     

    Researcher(s): Jennifer Ley

    Reviewer(s): Muhammad Bahari

    Editor(s): Maryam Nazir Chaudhary

    Designer(s): Sonia

    1. Malaysian Digital Economy Corporation. [cited 2023Jan27]. Available from: https://mdec.my/digital-economy-initiatives/for-the-industry/sme 
    2. Oecd. Malaysia MSME [Internet]. OECD iLibrary. OECD; 2022 [cited 2023Jan27]. Available from: https://www.oecd-ilibrary.org/industry-and-services/financing-smes-and-entrepreneurs-2022_3bc2915c-en  
    3. Issues and Challenges of Financial Inclusion Among Low-Income Earners In Rural Areas of Malaysia, Sharizan S., Turkish Journal of Islamic Economics, Vol. 8, 2021
    4. Digital divide sabah. Wiki Impact. [cited 2023Jan27]. Available from: https://www.wikiimpact.com/digital-divide-sabah/
    5. Department of Statistics Malaysia. [cited 2023Jan27]. Available from: https://www.dosm.gov.my/v1_/
    6. Tapping into the potential of digital banking, The Star, June 06, 2022
  • Watch out for Derivative Bombs in 2023

    Watch out for Derivative Bombs in 2023

    Introduction

    “In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Warren Buffett

    One still remembers the disastrous Global Financial Crisis (GFC) that happened over a decade ago and its ramifications that spurs reminiscence about undermined and proliferation of unregulated financial derivatives during that time. The excessive risk and over-extended leverage taken by speculators in derivatives trading have the capacity to expose the economy to systemic risks, as derivatives markets are free from the constraints of the real economy because their value is derived from financial assets and indices (Amadeo, 2021; Bajracharya, 2009). Greater regulation was followed by the third Basel Accord, a framework that sets international standards for banks. However, no matter what regulations are put in place, there are always channels to go around them (Bajracharya, 2009).

    Bank for International Settlements (BIS), the bank for central banks, recently reported concerns surrounding the issues of US dollar-denominated debt in currency derivatives such as swaps and forwards that are off-balance sheets (Borio, McCauley and McGuire, 2022, p. 67). In other words, they are hidden under the current accounting reporting framework and standard debt statistics. The majority of this hidden debt is due to the ever-expanding and intertwined links between the conventional financial system and the shadow banking sector (bank-like activities outside the traditional banking sector, such as funds) (Davies, 2022). 

    Therefore, it poses challenges to policymakers in scrutinising the situation as there are only shreds of information about the geographic distribution of the missing debt (Borio, McCauley and McGuire, 2022, p. 67-8). According to the BIS, this is an issue as swaps were a flashpoint during both the GFC and the early days of the Covid-19 pandemic when the US dollar funding prompted central banks to intervene to assist struggling borrowers (Ritchie, 2022). The explosion of the hidden debt is anticipated as the black swan event to look out for in 2023.

    The types of Derivatives; Foreign Exchange Swaps/Forwards and Cross Currency Swaps

    A foreign exchange swap or forward begins as an agreement between two parties with both wanting to borrow one currency and lend another simultaneously at an initial date (CFI Team, 2022b). The parties exchange quantities of equal value at the spot rate (current exchange rate), and then exchange amounts are determined by the forward rate when the contract matures. This arrangement allows each party to receive the currency lent and return the currency borrowed (CFI Team, 2022b). Note that the forward rate is simply the exchange rate on a future transaction, determined between the parties based on expectations.

    Illustrative example (assuming numerical values)

    Suppose Party A is from Malaysia and needs USD, whilst Party B is from the United States and needs MYR. Suppose both parties entered into a swap for six months. They agreed on the initial amount of RM100,000 or $25,000, based on an abstract spot rate of 4 USD/MYR. Both agreed on a forward rate of 4.5 USD/MYR as they deem that MYR will depreciate relatively to USD. After six months, Party A will then return $25,000 to Party B and receive RM112,500 from Party B, ending the swap. It allows both parties to hedge against forex risks and predict cash flows in the future. It is also evident for large entities such as central banks to engage in swaps/forwards without impacting the exchange rate.

    The difference between foreign exchange swaps and cross-currency swaps is the interest payment (CFI Team, 2022a). Suppose a European firm needs US dollars to invest in the United States, and the firm may find it expensive to borrow, which is evident as the dollar index has risen sharply in response to the aggressive rate hike by the Federal Reserve this year. Through a swap bank (acting as a middleman), the European firm may find a US firm with the opposite demand, as the US firm will find it relatively expensive to borrow euros since it is not a domicile firm (not based in Europe). Hence, cross-currency swaps function by finding a counterparty from a foreign country that can borrow at a lower local rate (CFI Team, 2022a). At the same time, the party borrows at their domestic rate, and the two parties promptly swap debt obligations. From our example, the European firm is responsible for repaying the dollar-denominated debt based on the lower local rate that the US firm borrowed. By using cross-currency swaps, entities could benefit from a lower borrowing cost and eliminate fluctuations in foreign exchange prices as the rate has been determined initially (CFI Team, 2022a). However, the risk is obvious as counterparties may fail to meet their obligations in repaying their loan (CFI Team, 2022a).

    Why is it troublesome now?

    Simple – Payment obligations arising from foreign exchange swaps/forwards and currency swaps are currently at staggering levels. The outstanding amount considering all currencies stood at $97 trillion as of end-June 2022, equivalent to the global GDP in 2021 and three times the global trade (Borio, McCauley and McGuire, 2022, p. 69). Dollar-denominated debts alone accounted for $80 trillion, exceeding the combined value of dollar Treasury bills, repurchase agreements, and commercial paper (Ritchie, 2022). Furthermore, the average swaps and forwards’ short maturity present the possibility of liquidity squeezes, with 80% of outstanding amounts maturing in less than a year as of end-June 2022 (Borio, McCauley and McGuire, 2022, p. 69). The problem arises when dollars become scarce, especially when borrowers frequently employ short-term swaps to purchase long-term assets (Davies, 2022). To see the sheer volume of settlement risk, Glowka and Nilsson (2022, p. 76) reported that in April 2022, $2.2 trillion of daily forex turnover was subject to settlement risk. The absolute on-balance sheet debt obligation and settlement risk is enormous, let alone those debts that are been hidden from the books.

    Figure 1 Forex swaps, Forex forwards and currency swaps outstanding, by currency (left) and maturity date (right) (Borio, McCauley and McGuire, 2022, p. 69)

    Conventional accounting standards let banks, pension funds, insurers, and others to only record their net derivatives exposure (Davies, 2022). The initial net exposure with a forex swap is zero and will only increase or decrease if exchange rates fluctuate (Davies, 2022). Although one may hide their debt obligations, the swaps and forwards need to be repaid eventually to the counterparty to complete the deal on the maturity date (Fox, 2022). As long as the foreign entity hangs onto the US-based asset, it has a currency obligation until the trade is completed (Fox, 2022). The concealed dollar debt unrecorded on the balance sheets of non-US banks and shadow banks as of June 2022 was $65 trillion, which was 2.5 times the size of the entire US Treasury market and accounted for 14% of global financial assets (Borio, McCauley and McGuire, 2022, p. 69-70; Davies, 2022; Ritchie, 2022). The figures have nearly doubled since 2008 (Davies, 2022). The missing dollar debt is mostly held outside the United States, with banks and non-banks holding approximately $39 trillion and $26 trillion, respectively (Borio, McCauley and McGuire, 2022, p. 69-70).

    Figure 2 US dollar-denominated debt held by non-banks outside the United States (left) and non-US banks (right) (Borio, McCauley and McGuire, 2022, p. 70)

    The Policy challenges, what the outlook is, and conclusion

    The foreign exchange and currency swap markets are prone to financing squeezes. This is significant during times of economic and financial turbulence, such as the GFC and in March 2020, when the COVID-19 epidemic wreaked havoc (Fox, 2022). Swap markets emerged as a flash point in both periods, with dollar borrowers compelled to pay exorbitant rates if they could borrow at all (Fox, 2022). Disruptions in dollar funding will pose systemic risks in the financial markets, and we may expect a financial meltdown whose scale is larger than the 2008/9 GFC. Exceptional policy in the form of central bank swap lines, whereby the Federal Reserve will transmit US dollars to major central banks, will be hard to implement and target due to asymmetric information  (Borio, McCauley and McGuire, 2022, p. 71). 

    However, the event this time is extraordinary. Off-balance sheet debts may be out of sight and out of mind for the time being. The concealed leverage and maturity mismatch in the portfolios of pension funds, insurance firms, and other entities, will only be revealed when the next dollar squeeze unfolds (Borio, McCauley and McGuire, 2022, p. 71). The situation will be accelerated by the possible continuous appreciation of the dollar, predicted by Alan Greenspan, former governor of the Federal Reserve Board (Sor, 2022). He said that the dollar would stay strong even if the Fed eventually eases up on rate hikes and pivots (Sor, 2022). Policy responses set to replenish the flow of funds would remain hazy and uncertain. The brink of collapse of the pension funds in the United Kingdom and Credit Suisse are not independent events and won’t be the last shocking event that we will navigate in the near future.

    Researcher(s): Yeoh Jia Xin

    Reviewer(s): Sherilynn Ngerng Siew Fong, Muhammad Bahari, Elina Yong

    Editor(s): Marcus

    References:

    Amadeo, K. (2021) Role of derivatives in creating mortgage crisis, The Balance. Available at: https://www.thebalancemoney.com/role-of-derivatives-in-creating-mortgage-crisis-3970477 (Accessed: December 12, 2022).

    Bajracharya, S. (2009) Are derivatives the cause of a financial crisis?, Research Gate. Available at: https://www.researchgate.net/publication/284174149_Are_derivatives_the_cause_of_a_financial_crisis (Accessed: December 12, 2022).

    Borio, C., McCauley, R. N. and McGuire, P. (2022) “Dollar debt in FX swaps and forwards: huge, missing and growing,” in Borio, C. et al. (eds.) BIS Quarterly Review. Bank for International Settlements, pp. 67–73. Available at: https://www.bis.org/publ/qtrpdf/r_qt2212h.pdf.

    CFI Team (2022a) Cross currency swap, Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/foreign-exchange/cross-currency-swap/ (Accessed: December 12, 2022).

    CFI Team (2022b) Foreign exchange swap, Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/derivatives/foreign-currency-swap/ (Accessed: December 12, 2022).

    Davies, P. J. (2022) It’s the $65 Trillion in Debt You Can’t Find That’ll Get You, Washington Post. Available at: https://www.washingtonpost.com/business/its-the-65-trillion-in-debt-you-cant-find-thatll-get-you/2022/12/05/92560836-749d-11ed-a199-927b334b939f_story.html (Accessed: December 12, 2022).

    Fox, M. (2022) “There’s an $80 trillion ‘blind spot’ in the financial system that could spell trouble for markets as debts held off-balance sheet grow at a rapid pace,” Business Insider, 7 December. Available at: https://markets.businessinsider.com/news/currencies/80-trillion-off-balance-sheet-debt-blind-spot-financial-system-2022-12 (Accessed: December 12, 2022).

    Glowka, M. and Nilsson, T. (2022) “FX settlement risk: an unsettled issue,” in Borio, C. et al. (eds.) BIS Quarterly Review. Bank for International Settlements, pp. 75–81. Available at: https://www.bis.org/publ/qtrpdf/r_qt2212i.pdf.

    Ritchie, G. (2022) ‘Huge, missing and growing’: US$65 tril in dollar debt sparks concern, The Edge Markets. Available at: https://www.theedgemarkets.com/article/huge-missing-and-growing-us65-tril-dollar-debt-sparks-concern (Accessed: December 12, 2022).

    Sor, J. (2022) “The US dollar will stay strong even once the Fed eases rate hikes, and the central bank’s balance sheet reduction is the ‘elephant in the room,’ former Fed chief Alan Greenspan says,” Business Insider, 2 November. Available at: https://markets.businessinsider.com/news/currencies/alan-greenspan-us-dollar-dominance-fed-rate-hikes-quantitative-tightening-2022-11 (Accessed: December 18, 2022).


    Researcher(s): Yeoh Jia Xin

    Reviewer(s): Sherilynn Ngerng Siew Fong, Muhammad Bahari, Elina Yong

    Editor(s): Marcus

    Designer(s): Qurratul Ainin

  • The strengthening of the dollar and its effects on emerging markets

    The strengthening of the dollar and its effects on emerging markets

    The Dollar has just gone up by around 19%, according to the Dollar Index (DXY), which is measures the strength of the USD relative to a basket of other foreign currencies. This simply means that it is now more expensive to buy dollars, and dollars can buy more of other currencies. To put things into context, the dollar is now at parity with the euro ($1 could be exchanged for €1), for the first time in 20 years.

    Figure 1: DXY graph for 2022

    So why has the dollar been strengthening so dramatically?

    Inflation in the US has spiraled out of control this year reaching up to 9.1% in June 2022, almost 5 times the Federal Reserve’s target rate of 2%. The pandemic has caused mass food supply chain disruptions causing food prices to rise. The Russian invasion of Ukraine has led to a global spike in energy prices. Fertiliser shortages from Ukraine, topped with poor harvests and livestock illnesses, have jacked food prices up even higher. The daunting effects of international crises have spilled over to domestic households in the USA and consumers are paying the price.

    In order to combat the rising inflation, the Fed has taken a hawkish monetary policy stance to keep inflation under control. By raising interest rates, borrowing costs would increase and in theory, this would reduce demand, easing the upward pressure on prices. Hence in just 6 months, the Fed has raised interest rates from 0.25% to a staggering 3.25%, with aggressive rate hikes of 75 basis points (0.75%) in June, July, and September. And the Fed doesn’t aim to stop there just yet – it is expected that the Fed will raise their interest rates to 5% by March 2023 in order to curb the two-decade-high inflation.

    Figure 2: Federal reserve interest rates in 2022

    When the Fed raises its interest rates, the demand for the greenback increases as investors worldwide seek to profit from higher short-term interest rates. These inflows of foreign funds into the US are known as “hot money”. To better illustrate this mechanism, foreign investors could get higher returns when they deposit money in a US bank, rather than in a European bank, when interest rates in the US are higher. As such, investors are more inclined to exchange their money for dollars to be deposited. Following the mechanism of demand and supply, the value of the currency would then gain strength.

    Interest rates aren’t the only factor driving up the demand for the USD – stocks, bonds, real estate, and cryptocurrency are underperforming and have just become riskier to invest in. The USD benefited from a confluence of recent events – volatile financial markets, supply chain issues, global inflation, etc. With less confidence to invest in riskier assets, investors opt to place their money on the dollar which is regarded as their safe haven, an asset that could retain or even increase its value during an economic downturn.

     

    How is this important to other countries?

    Being the world’s reserve currency, the dollar plays a significant role in the international market. Most international financial transactions take place using the USD – a large portion of international loans and about 60% of international and foreign currency liabilities are denominated in U.S. dollars, USD. With the dollar’s global significance, the impact of its strengthening reaches beyond its borders and affects financial markets around the world.

    Among them, emerging markets (EM) have been hit particularly hard by the stronger dollar. Emerging markets are generally developing economies that are transitioning to being “developed” through industrialisation, such as Brazil, Malaysia, China, and Pakistan. Despite experiencing rapid economic growth, most open emerging economies are price takers when it comes to international trade – their economies are not significant enough to affect the global market.

    Imported inflation and trade troubles

    In emerging economies, dollar strength translates into higher import costs. Due to the dollar’s stability and store of value, most key commodities such as crude oil, wheat, and copper are priced in dollars when traded. With the USD on the rise, the purchasing power of non-US currencies declined and imports became more expensive for EMs. Hence, there arises a concept that a higher-valued dollar exports inflation to other economies. Annual inflation in Argentina skyrocketed to a rate of 50%, and Turkey at 70%. Countries such as Turkey, Egypt, and Kenya are deemed to be at financial risk due to their heavy reliance on food and energy imports while experiencing major current account deficits.

    A significant rise in the dollar would in turn depress global trade growth as countries become less engaged in trade, in light of spiking commodity prices. For most developing countries that are especially dependent on global trade, the value of their GDP would likely take a hit. This is unfavourable for China – small and medium enterprises may experience a squeeze in profitability as the renminbi weakens against the dollar. It would likely produce knock-on effects and exacerbate the situation in EMs given their ties with Chinese supply chains and export markets.

    However, this may not be the case for export-led EMs. On the flip side of imports being more expensive, EMs exports become cheaper for foreign buyers. Increased foreign demand for exports means GDP would increase, which helps to offset other negative impacts of the stronger dollar. Commodity-exporting economies could also benefit from dollar-strengthening. As the world’s largest copper exporter, Chile saw its currency gain 8% in the first quarter since the dollar’s value was raised. However, the Chilean Peso dropped afterward due to slowing world copper demand stemming from production cuts in China.

    Capital flight and dampened economic growth

    Most emerging economies rely heavily on foreign investments as it forms the basis for businesses and the economy to grow. However, as the US hikes its interest rates, foreign funds totaling more than $38bn have pulled out from EMs within five consecutive months in 2022, indicating the longest period of net outflows since 2005. The US has become a more attractive destination to secure funds as federal rates have risen. Fears of a recession have also led investors to retrench their funds from riskier EMs and flee to safer assets.

    To remain competitive, EMs have to follow in the footsteps of the US and raise their interest rates. In other words, higher returns have to be promised to avoid capital flight from an EM to less-risky US assets. This leads to a dilemma for emerging economies – rate hikes are ideal to protect foreign investments, but on the other hand, they would increase borrowing costs. This would dampen aggregate demand and lead to downward economic growth, pushing some EMs to be at risk of a recession.

    Debt becomes more expensive 

    EMs rely on debt to finance expenditures in both private and public sectors, and they repay the money slowly over time with interest rates. They may take out debts in the form of government-issued securities or direct loans from financial institutions.

    A feature of debt is that they are often dollar-denominated, due to the fact that lenders deem the dollar far less volatile than currencies of emerging markets. Since the dollar has strengthened against other currencies, it became more expensive for EMs to service their debts. This is because emerging countries have to convert their domestic currency into USD to pay off most of their debts, meaning additional financial stress is placed on emerging markets. When USD: MYR = 4.0, an initial debt of $1000 could be paid back with RM4000, but when the exchange rate rises to 4.7, a larger figure of RM4700 is needed.

    As the Covid-19 pandemic had pushed borrowing in emerging economies to an all-time high, the financial stress arising from a more expensive debt has been magnified. During the pandemic, huge expenditures on fiscal stimulus, coupled with lowered tax revenue due to unemployment, have resulted in extensive government borrowing. In 2020 alone, debt amounted to 207% of the GDP in emerging economies. With a quarter of the debt being dollar-denominated, the rise in USD has accounted for a major increase in debt repayment figures by emerging economies.

    Sri Lanka just defaulted on its foreign debts in April, and countries such as El Salvador, Ghana, Pakistan, Tunisia, and Egypt are at risk of defaulting too, according to statistics from Bloomberg. When the risk of default is high, bond yields also rise, meaning that dollar-denominated debt has just become an even bigger burden for emerging markets. Governments borrow money from investors to finance their expenditures, by selling bonds and offering each bond with returns (known as yields). Bond yields typically increase to compensate for the increased risk of defaulting (not paying) on the bond. Therefore, because of the financial stress that EMs are experiencing, the default risks of EM bonds have increased. Hence, higher bond yields have to be offered to entice investors.

    Conclusion

    The strengthening of the dollar has just made the situation for EMs recovering from the pandemic much more complicated – imported inflation leading to trade decline, international capital flow reversals, and heavier debt burdens.

    Some argue that despite the Fed’s mandate to solve domestic issues, it should take its decision’s impact on the rest of the world into account. This is because economies have become much more interdependent on each other than before, as a result of financial and trade globalisation, said Mr. Obstfeld, a U.C. Berkeley economist. However, most economists hold the stance that despite the fallouts of a stronger dollar, the effects on other countries would be even worse if inflation in the US is not lowered to a targeted level.

    So if pushing the dollar up is necessary, how could EMs minimise the negative impacts imposed on them? The increasing reliance on floating currencies may offer an answer. As opposed to pegging currencies in the past, EMs have now gained greater leverage over managing the value of their currency by utilising deeper foreign-exchange reserves. Some EMs such as Brazil are already responding to the Federal Reserve’s rate hikes with rate hikes of their own which has effectively countered inflation and currency declines against the USD. So far, some EMs are demonstrating astounding resistance to the vicious global financial conditions. The IMF has forecasted that EMs are expected to outgrow major economies this year and next.

    Not all EMs however enjoy the stability that some of their counterparts experience. A strong headwind is approaching not only these EMs, but the world as a whole.

    (1740 words)

    References:

    Bertaut, C., Beschwitz, B.von and Curcuru, S. (2021) The International Role of the U.S. Dollar, The Fed – The International Role of the U.S. Dollar. Available at: https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.html (Accessed: November 2, 2022).

    Best, R. (2022) How the U.S. dollar became the world’s reserve currency, Investopedia. Investopedia. Available at: https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp#:~:text=The%20Bottom%20Line,-The%20reserve%20status&text=The%20trust%20and%20confidence%20that,currency%20for%20facilitating%20world%20commerce. (Accessed: November 2, 2022).

    Cohen, P. (2022) The dollar is strong. That is good for the U.S. but bad for the world., The New York Times. The New York Times. Available at: https://www.nytimes.com/2022/09/26/business/economy/us-dollar-global-impact.html (Accessed: November 8, 2022).

    Emerging markets look unusually resilient (2022) The Economist. The Economist Newspaper. Available at: https://www.economist.com/finance-and-economics/2022/10/13/emerging-markets-look-unusually-resilient (Accessed: November 3, 2022).

    Estevao, M. (2022) Three ways a strong dollar impacts emerging markets, World Bank Blogs. Available at: https://blogs.worldbank.org/voices/three-ways-strong-dollar-impacts-emerging-markets (Accessed: November 1, 2022).

    Fowers, A. (2022) What is Causing Inflation: The Factors Driving Prices High Each Month, The Washington Post. WP Company. Available at: https://www.washingtonpost.com/business/2022/07/26/inflation-causes/ (Accessed: November 2, 2022).

    Gopinath, G. and Gourinchas, P.-O. (2022) How countries should respond to the strong dollar, IMF. Available at: https://www.imf.org/en/Blogs/Articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar (Accessed: November 2, 2022).

    Hartman, M. (2022) Why the U.S. dollar is so strong right now, Marketplace. Available at: https://www.marketplace.org/2022/08/29/why-us-dollar-is-strong/ (Accessed: November 1, 2022).

    Kalemli-Özcanis, Ş. (2021) The Federal Reserve, emerging markets and private debt – IMF F&D, IMF. Available at: https://www.imf.org/en/Publications/fandd/issues/2021/06/federal-reserve-emerging-markets-private-debt-kalemli-ozcan#:~:text=In%20emerging%20markets%2C%20a%20disproportionate,constitute%20the%20remaining%2035%20percent. (Accessed: November 2, 2022).

    Lee, Y.N. (2021) Rising debt in emerging markets could push back Covid recovery and widen gap with developed world, CNBC. CNBC. Available at: https://www.cnbc.com/2021/05/24/moodys-analytics-on-high-debt-covid-recovery-in-emerging-markets.html (Accessed: November 2, 2022).

    Lubin, D. (2022) A stronger dollar might hit emerging economies harder this cycle, Financial Times. Financial Times. Available at: https://www.ft.com/content/3e8737a0-b4c1-4e7c-b93f-f646e3c699dd (Accessed: November 1, 2022).

    Maki, S. (2022) Why Developing Countries Are Facing a Debt Default Crisis, Bloomberg.com. Bloomberg. Available at: https://www.bloomberg.com/news/articles/2022-07-07/why-developing-countries-are-facing-a-debt-default-crisis (Accessed: November 2, 2022).

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    Researcher(s): Alexander Chen, Eunice Jong

    Reviewer(s): Nasir Ali

    Editor(s): Maryam Nazir Chaudhary

    Designer(s): Erdina Mysarah

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