U.S. monetary tightening wrecks havoc on emerging economies, says Malaysian economist

KUALA LUMPUR, Oct. 11 (Xinhua) -- The U.S. Federal Reserve's aggressive monetary tightening inevitably has reinforced the U.S. dollar's supremacy and harmed emerging economies, a Malaysian economist told Xinhua in a recent interview.

Emerging economies have to cope with the negative, often disruptive spillover effects from higher U.S. interest rates and a strong U.S. dollar, said Lee Heng Guie, executive director of the Socio-Economic Research Center of the Associated Chinese Chambers of Commerce and Industry of Malaysia.

Lee said that the effects include capital reversals due to interest rate differentials, increased debt burdens, increased cost of imports, a depreciated domestic currency and tightening financial conditions.

"The incredible Volcker disinflation that occurred in the early 1980s, which saw a steep rise in U.S. interest rates, was associated with a sharp rise in the incidence of financial crises in emerging market economies," he said.

In the mid-1990s, then U.S. Fed chairman Alan Greenspan also raised interest rates to manage inflation and avoid recession, with the consequences ripping through vulnerable emerging markets, he added.

Lee said that U.S. interest rate hikes bring about collateral damage to emerging economies with low foreign reserves and high exposure to external debt, especially short-term debt.

"The Malaysian economy is not immune from the negative spillover effects from higher U.S. interest rate and a strong U.S. dollar," he noted.

"The weak ringgit increases the imported cost of intermediate and capital goods used for production and investment," and domestic businesses have to pay more for imported inputs, and hence lower profit margins, he said, expressing worries that Malaysia's exports may drop if global economic growth slows down in 2023.

"Malaysia's central bank Bank Negara Malaysia has deployed its international reserves to mitigate the significant withdrawal of foreign currency liquidity and prevent excessive ringgit exchange rate fluctuations that would have harmed the Malaysian economy and businesses," he said.

"The flexible exchange rate regime allows the ringgit to adjust against the two-way capital flows," Lee said.