The US Reserve has raised the interest rate by a quarter of a percent due to its desire to face inflation, which has reached nearly 8% in America. But, of course, many consequences have resulted from this decision, especially for developing countries and emerging markets
Below we will discuss the most important reasons for this decision and the impact of the resolution on emerging countries, especially Egypt, and what results have resulted from this
U.S. Federal Decisions
Any country in the world puts its interest first in mind and takes all measures, legislation, and policies that meet its objectives and the safety of its economy. What happened is that after the promise of recovery in the global economy last January has emerged. At the same time, a massive wave of inflation has emerged with him
The inflation wave has had the most significant impact on emerging economies globally and emerging markets. This wave was created to survive and continue. For the first time in 40 years, the US inflation indices reached 7.9% last February; although the effects of the Russian-Ukrainian war were initially, its effects were not yet visible
The impact of U.S. Federal decisions on emerging markets
In a simplified manner, inflation means increasing demand in front of a lack of goods and higher prices. To counter inflation, the first is to raise the interest rate. The US Central Bank decides this. It is expected to continue to raise the interest rate by one-quarter of a percent per meeting, which means interest rates are expected to reach 1.75%.
As a result of the decisions taken by the US Federal, commodity prices have increased oil prices significantly. Therefore transport, shipping, and import prices have increased, causing higher prices for most commodities in all countries, including Egypt
The effect of raising interest rates on the economy
For the United States, the US Federal decisions will reduce inflation rates. Still, on the other hand, they will raise lending costs to individuals, companies, and governments and also affect the US gold market, where Americans will prefer to keep their money in bonds and treasury bills.
It has also led to a rise in the dollar rate, and exports will decrease to increase their cost. The rise in the dollar has also greatly affected cryptocurrencies, whose value has fallen significantly.
The effect of raising interest rates on emerging markets
As a result of the fact that the US economy is the largest globally, emerging markets in the world's emerging economies are greatly affected. Those countries and most countries link their national reserves to the dollar rate and not a basket of currencies.
For example, the national reserve in Egypt or Kuwait is linked to a basket of currencies, so the increase in the dollar rate here has a lower risk to the national reserve. On the other hand, GCC countries such as the UAE and Qatar link their reserves to the dollar rate, resulting in a direct interest rate hike.
The impact of the interest rate on investment
Investors usually look for the highest return and lowest risk, so they direct investments toward countries that raise their interest rates more. One of the dependencies of Fed decisions was that investors withdrew their money from emerging markets and looked for investment in the US market.
This has led most emerging economies to raise the interest rate to attract the most significant number of investors again. However, with the rise in the dollar rate and inflation increases, demand for goods will decrease. Therefore, the profits earned by companies, especially startups, will decrease, affecting many companies’ shares.
Most investors have moved away from buying shares and directing their money toward a guaranteed investments such as bank bonds and treasury bills. For example, gold companies have decreased demand for them, and many investors sold their gold property and transferred their money to bank bonds. As a result, its value has been halved.
Stopping the import of certain goods and its impact on emerging markets
During the two weeks, there were some rumors about the issuance of some new government decisions concerning the suspension of importing some goods, which included about 13 items. However, the Central Bank came out to lie rumors by the end of March, but it returned to reissue import halting decisions, and it was one of the essential goods that were made. Stop it
Cars that are entirely manufactured abroad
Mobile phones and accessories that belong to it
Flowers and plants
Heavy equipment such as cranes and others
The Central Bank has stopped the use of collection documents to import goods and replaced them with documentary credits. Of course, this decision will negatively affect emerging markets and startups, as it will cause a change in the shipping time of goods and commodities and thus a significant increase in prices in the coming days.
Startups that depend on an imported commodity that has been banned for their production will also face… It will face real crises that may cause the end of its business life. These decisions will also cause some traders and importers to manipulate the recorded values of goods allowed to be imported because the State will later have to raise the value of customs expenses.
This will also lead to an actual deficit in emerging markets to meet the market’s needs for those goods, relying only on what can be provided locally, which may not be of the same quality and artistry, and there will be a general recession in most emerging markets such as the heavy equipment market.
Interest rate, investment, income, and savings relationship
There is a strong correlation between the interest rate on the one hand and investment, income, and savings on the other. As we said, the high-interest rate in the United States of America has led to the transformation of investors from emerging markets to the US financial markets, and this has led to:
The depreciation of the local currency of countries with emerging markets.
High lending costs. Countries with emerging economies resort to borrowing from foreign financial markets to cover the financing gap within the country.
Fourth is the lack of foreign exchange flows, which will put pressure on the state and find it more challenging to pay off its foreign debt, but some countries with emerging markets make foreign exchange reserves to secure them in times of crisis.
Perhaps the most explicit examples. Egypt’s monetary reserve has helped pay off its foreign debt since the January 2011 revolution until now.
The global economy is now unclear. Often, as the war continues, the global order will be reshaped, and until this time, the crises facing emerging markets will continue until things stabilize.
Interest rate is known to be linked to a critical factor, income.
The more income increases, the more savings. The increase in domestic savings will lead to the increased attraction of foreign investments, but raising the interest rate means that the purchasing value of a citizen’s income is reduced. Therefore, the value of income decreases, so the state is working to raise the exchange rate of the local currency and increase the income of individuals.
The relationship between saving and interest rate is a direct relationship. The higher the interest rate, the more savings.
The higher the interest rate, the more investments attracted.
How do emerging market companies face higher dollar rates and interest
Emerging markets are facing a real crisis to face higher interest. Therefore, companies are looking for the best ways to solve these successive crises. Perhaps the most important solution to consider is financial management. Good financial management can successfully manage the company’s financial conditions and sound financial planning to survive the risks of the current situation
In this framework, the Accounting Office of “Egyptian Certified Accountants” provides all financial, accounting, legal, tax, and internal and external auditing services. An integrated team consisting of more than one economist and financial expert, consultants, and specialists in economics and accounting sciences is fully aware of all International laws and follows up on the most critical developments in the global economy
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Evaluate your company’s financial management and evaluate overall performance
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Significant experience in dealing with all financial markets and emerging markets
Reports to identify the best appropriate funding sources.
External audit of all departments, including financial management, ensures that your company is free of errors or theft
Correct the company’s financial errors to solve the current crisis and avoid future crises.
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Using the latest technological and digital means and tools suitable for your company’s accounting system
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The Egyptian Chartered Accountants Office is one of Egypt’s most prominent accounting offices and the Arab world. God willing, it guarantees that your company will survive the global financial crisis and save your place in emerging markets and global markets. It also guarantees you to achieve the highest profits in the least time while ensuring the quality of work and low cost,your first consult for free. So please feel free to contact us now