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Rising global interest rates could pose fiscal challenges for a slew of countries and hence add pressure to their credit ratings, according to a report by S&P Global, which measured the direct fiscal costs to governments of two interest rate shock scenarios.
Those two scenarios included an increase of 100 basis points in the cost of refinancing government debt, as well as a 300 bps hike.
In reference to the scenario of increasing borrowing costs by 3% in the next three years, “rising rates look to be fiscally challenging for a minority of developed market sovereigns and at least six out of 19 emerging market sovereigns,” S&P Global reported Wednesday.
Ukraine, Brazil, Egypt, Ghana and Hungary are seen as the most vulnerable emerging market countries to a 300 bps rise in refi costs.
For Italy, a heavily indebted nation within Europe, S&P Global said a 300 bps three-year interest rate shock would move its interest costs as a percentage of GDP to 5.5%, which would be its highest debt bill since 2012.
As for emerging market nations with annual gross refi needs of over 10% of GDP, including Brazil, Hungary, Ghana, Egypt and Kenya, “the uncertainty and direction of the Federal Reserve’s rate policy will remain a key risk through to the end of 2022.” Note the Fed has already lifted its policy rate target range by 175 basis points since it first embarked on its tightening cycle in March amid stubborn inflation.
Related ETFs: iShares MSCI Brazil (NYSEARCA:EWZ), iShares MSCI Italy (NYSEARCA:EWI) and VanEck Vectors Egypt Index (NYSEARCA:EGPT).
Earlier, Fed Chairman Jerome Powell reiterated his stance that “ongoing rate increases will be appropriate” to combat persistently high inflation.
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