US monetary policy intensifies pressure on emerging markets

US Federal Reserve policymakers may be more aggressive in tightening monetary policy, which will have an impact on emerging markets, said Ehab al-Desouki, head of the Economy Department of Cairo-based Sadat Academy.

Over the past two decades, the increased globalization of the world economy has been reflected in the growing dependence of emerging markets' development on the US economy, the Egyptian economist told Xinhua in a recent interview.

He stressed that the impact of changes in US monetary policy on emerging markets should not be underestimated.

US Federal Reserve rate increases could tighten financial conditions globally and lead to capital outflows and currency depreciation in emerging markets, al-Desouki said, adding that "US rate hikes are often bad news for emerging markets, and the inflationary pressures they made are very disruptive."

In Egypt, a US Federal Reserve's possible rate hike causes outflows of "hot money" which are funds controlled by investors seeking short-term returns by moving their capitals between countries to profit from varying interest rates, al-Desouki said.

At the same time, the Egyptian pound will be facing depreciation pressure, he added.

Given the growing tensions between Russia and Ukraine and the protracted supply chain issue, investors will withdraw from emerging markets, including Egypt, and opt for stable economies, he said, noting that emerging markets may face a number of financial and economic challenges in the short and medium terms.

While the devaluation of the Egyptian pound is expected, the central bank and the stock exchange of Egypt should take measures to mitigate its impact on the people, the expert said.

Additionally, Egypt is under severe pressure to face the unprecedented waves of inflation, and the floating of the Egyptian pound is conducive to attracting capital inflows and obtaining fund from international financial institutions, said al-Desouki.

He also noted that Egypt should expand its social security program and financing projects, as outflows of hot money, due to the US monetary policies, will pose high pressures on emerging markets' local currencies, increase inflation, and decrease growth.