Interest Rate Rise Hurts Global Fortunes
people who have plowed their savings into real estate are vulnerable. In Malaysia, businesses struggle with higher costs for items priced in dollars as the local currency falls. In Mexico, families are buffeted by a volatile currency that was already flagging on threats from President Donald J. Trump to tax goods coming over the border.
“Every time the peso goes down, we can afford less and less,” Ms. Reyes said on a recent evening. “We’re thinking about going back to Veracruz. People are leaving the factories and going back to their towns.”
As the financial crisis unfolded in 2008, the central bank took extraordinary measures to keep credit flowing. The result was a surge of investment into emerging markets.
More than $259 billion poured into developing countries the next year, according to the Institute of International Finance, a trade association. From 2010 to 2015, the annual capital flows to those places averaged $328 billion.
In 2013, the Fed surprised markets with plans to slow its stimulus efforts. Investors then stampeded out of emerging countries, sending currencies plunging in Brazil, India, Indonesia, South Africa and Turkey.
“The effect of interest rate increases on emerging countries is surprisingly strong,” said Gary Clyde Hufbauer, a trade expert at the Peterson Institute for International Economics.
Most economists assume the rate increases expected this year will play out far less dramatically. The Fed has telegraphed its plans, giving investors time to prepare. Many emerging countries have amassed larger reserves of dollars, to partially counter a drop in their currencies.
Still, some countries are already showing strains.
Turkey’s currency has dropped about 25 percent since May, and its government is operating with meager reserves. China swiftly reacted to the Fed’s action with its own interest-rate increase on March 16.
Within the investing world, the peso functions as a proxy for all developing countries — the thing to bet against when sentiments go negative. “It’s kind of the first port of call for anyone who thinks something bad is going to happen to emerging markets,” said Mark Weisbrot, a director of the Center for Economic and Policy Research in Washington. “Mexico is vulnerable.”
Chinese leaders have long nursed fears about an uncontrolled exodus of cash. A currency plunge would increase prices for Chinese consum- ers, generating public anger. It could pop the real estate bubbles that have developed in many Chinese cities.
Allen Zhang, an electrician who works at a coal mine in the mountains of central China, lives in a modest house on the edge of Jincheng.
Mr. Zhang has sought to supplement his $290- a- month pay by satisfying new demand for housing. He has tapped into his savings and used his handyman skills to add six rooms to his family home, renting the new quarters out to factory workers. A buyer recently offered $ 350,000 for the house — a sum equivalent to what Mr. Zhang would earn in the mines over a century. He turned it down. “I want more,” he said.
A year ago, the lights were burning brightly for Vivy Yusof, a Malaysian entrepreneur. Ms. Yusof is part of a group of tech- savvy business leaders who have emerged as Malaysia tries to evolve beyond its traditional dependence on selling commodities like palm oil and petroleum. Growth has been flagging, a reality playing out across Southeast Asia as the region adjusts to China’s slowdown. China is not buying commodities the way it used to.
Malaysia faces potential instability, as Prime Minister Najib Razak confronts accusations that people close to him harvested $1 billion from a state investment fund he oversaw. He denies wrongdoing.
Even before the Fed’s move, global investors were fleeing. Malaysia’s currency, the ringgit, has lost 8 percent against the dollar in the last year. Imports are more expensive.
Ms. Yusof sells hijabs, catering to cosmopolitan Muslims. Some of her garments are made in China. When the dollar rises, her profit margins are squeezed. And though online sales are brisk, business at her three mall stores has begun to slow. “We used to do a lot better,” she said.
In Mexico, Ms. Reyes, 47, has no way to cut her own costs, beyond putting less food on the table. She makes auto parts that go into transmissions, earning 162 pesos per day, or about $8.40. Her husband earns 149 pesos per day — about $7.75 — making fuses for electrical boxes. But as the peso has surrendered roughly one-fourth of its value over the last five years, their living standard has deteriorated. Her family subsists mainly on beans and pasta.
She pointed toward a bodega near her house. “Eggs are twice the price they were six months ago,” she said. “We’ve been buying less.”
She used to send money back to her family in Veracruz, where one of her sisters is blind. Not anymore.
Inside the concrete- block home she shares with her husband, their three daughters and their three grandsons, the ceiling is stained from leaks. The walls are crumbling.
As the family members prepared to share a lone bed, positioning their bodies sideways to maximize space, they had no heat to cut the chilly night.
“We use blankets,” Ms. Reyes said, “and what love we have.”