Buffeted by a year of rapid Fed rate hikes, emerging markets now face additional headwinds from disruptions to the global banking-system. When the Fed began raising rates in March 2022, the 26% sell-off in emerging markets equity indexes that began in February 2021 accelerated. That trend looks set to deepen as a weak banking system threatens to push the world into recession. Presented by @cmegroup:

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Over the past few years, emerging markets have experienced rapid growth and development, becoming key players in the global economy. However, as the world braces for a potential global recession, these markets are starting to feel the weight of the risk.

Emerging markets, which include countries like Brazil, India, China, and many others, have been major contributors to global economic growth. Their expanding middle class, robust consumer demand, and attractive investment opportunities have attracted significant capital flows, making them an integral part of the global supply chain.

Yet, as the COVID-19 pandemic continues to wreak havoc on the global economy, these markets are facing unique challenges. The outbreak has disrupted global supply chains, leading to a decrease in exports and impacting the manufacturing sectors of these emerging economies. Furthermore, the unprecedented decline in consumer spending has increased financial stress on businesses, pushing some to the brink of bankruptcy.

Adding to the already grim scenario, these markets are also grappling with a decline in foreign direct investment (FDI). With investors prioritizing stability and safer havens, emerging markets are being bypassed in favor of more secure options. This lack of investment has resulted in a further slowdown of economic growth and job creation in these vulnerable economies.

Another significant factor contributing to the risk of a global recession in emerging markets is the excessive reliance on commodities. Many countries in these markets heavily depend on commodities such as oil, minerals, and agricultural products as major sources of revenue. The sudden drop in oil prices and disruptions in supply chains have put immense pressure on these economies, and they are starting to feel the financial strain.

Moreover, the depreciation of local currencies against the strong US dollar has made it difficult for these countries to service their external debt, which is often denominated in US dollars. This has led to a rise in borrowing costs and an increased risk of default, pushing these economies further into a state of uncertainty.

Governments and central banks in these markets are working to mitigate these risks by implementing stimulus measures and cutting interest rates to boost economic activity. However, the effectiveness of these measures is limited due to the diminished fiscal space and high levels of existing debt.

It is important to note that emerging markets are not alone in feeling the risk of a global recession. Developed economies are also facing significant challenges, including high unemployment rates and wavering consumer demand. Yet, emerging markets are more vulnerable due to their limited resources and higher exposure to external shocks.

As the world grapples with the potential of a deep global recession, it is crucial for policymakers and international organizations to coordinate efforts. Emerging markets need support and assistance to navigate these challenging times. Strengthening global financial safety nets, providing debt relief, and ensuring access to affordable financing are essential steps towards mitigating the risk and safeguarding the stability of these economies.

In conclusion, emerging markets are feeling the risk of a global recession caused by the COVID-19 pandemic. The disruptions in global supply chains, decline in FDI, excessive reliance on commodities, and currency depreciation are all factors contributing to the vulnerability of these markets. Collaborative efforts and support from the international community are needed to mitigate the risks and ensure the resilience and growth of these economies in the long term.