In a recent report, the International Monetary Fund (IMF) and Institute of International Finance (IIF) both warned about the potential impact of rising inflation in the US and delayed Federal Reserve rate cuts on the global economy. The IIF highlighted the risk of a dollar rally leading to government debt strains, especially for developing countries with high levels of dollar-denominated debt. Meanwhile, President Joe Biden’s administration has been adding to the already growing US debt pile despite households reducing their personal loans and credit card debts.
While household balance sheets in the US may provide some protection against rising interest rates, government budget deficits remain high compared to pre-pandemic levels. The IMF also echoed similar concerns, urging governments worldwide to show fiscal restraint and maintain sound public finances, especially in an election year with the temptation to cut taxes or increase spending. Both organizations also raised concerns about rising trade frictions and geopolitical tensions affecting the external debt servicing capacity of emerging markets that have high levels of dollar-denominated debt.
Inflation is one of the main drivers behind these concerns as stubborn inflation, particularly in the US, poses a significant risk by increasing global funding costs. Additionally, trade disputes and protectionist policies could hinder economic growth and investment flows, further impacting the ability of emerging and frontier markets to service their debts. Overall, both organizations are warning governments around the world to be cautious in their fiscal policies while taking into account potential risks from inflation, trade tensions, and geopolitical instability.