IMF warns rates, conflict and climate top emerging markets risks

The International Monetary Fund warned that emerging markets must grapple with post-pandemic risks from tougher global financial conditions, the fragmentation of world trade into rival blocs and the impact of climate change.

Those forces are "transforming the economic landscape and making the world more volatile and uncertain," Gita Gopinath, the fund's No 2 official, said at a central banking conference in Cape Town, South Africa on Friday.

Addressing those interconnected challenges will require an array of tools, she said, including more efficiently raising revenue and spending, diversifying trade, accelerating reforms to attract more investment, and implementing fiscally and socially sustainable climate strategies.

Global interest rates could remain high "for quite some time" amid the fight against inflation, she said, adding that average long-term yields on emerging market dollar bonds have risen about 200 basis points — meaning their borrowing costs are higher — since the Federal Reserve began tightening policy. Bond issuance and portfolio flows into emerging markets have also slowed.

Meanwhile, trade restrictions — aimed at avoiding the repeat of supply chain and national security shocks of the pandemic and Russia's war in Ukraine — will likely increase costs and narrow the pool of trading partners.

IMF simulations find that this "geo-economic fragmentation" could benefit some emerging markets, but most will lose, with some facing output losses worth more than 10% of gross domestic product.

As well, fragmentation in foreign direct investment would hurt emerging markets hardest because dollars from advanced economies often also come with access to better technologies and know-how, she said.

Gopinath also underlined the costs of climate change, noting that the estimated $2 trillion annually that emerging and developing economies must spend by 2030 to mitigate the impact will become more challenging amid limited fiscal space, tighter global financing conditions and geopolitical fragmentation.

The IMF, in its most recent update to its World Economic Outlook in July, warned that prospects for growth look weak compared with the 3.8% average during the two decades prior to the Covid-19 pandemic and that "the balance of risks to global growth remains tilted to the downside."