Implications of Global Rising Interest Rates on Capital Flows and Balance of Payments in Emerging Economies

Global interest rates play a significantly large role in the flow of capital and the balance of payments in emergent economies. High interest rates require international investors to re-allocate their funds, competing with domestic placements; conversely, low interest rates however promote this diversification. These flows are further modified by the international business cycle. The costs of higher interest rates vary. Countries where large amounts of capital fled when interest rates were low now have troubles readjusting their external borrowing and spending. The U-turn of private foreign capital also forces countries to lend more money in order to stabilize their banking systems and exchange rates. Those that rely primarily on official flows are better off. This is indicated by a spectrum with two poles. Official capital is the major source for low-income countries and they can tolerate higher interest rates more; while middle-income countries have much more of their distress centers on commercial liabilities. Non-oil resource-exporting countries are the most equivocal. They gain some direct transfers from official sources but most of their inflow is dependent on private capital and therefore vulnerable to changes in international financial conditions.