Capital that had once sought higher returns in emerging markets would now reverse, causing sharp falls in domestic equities, rising bond yields and eroding foreign reserves. If the domestic economy is highly leveraged as most emerging markets post-pandemic are, the consequences can be brutal. In addition to possible recession in 2023, the report warns of a potential string of financial crises in emerging markets. Clearly, further rate increases by the Fed could tip several emerging markets into serious financial problems. Alas, all this is not new; every time the Fed raises rates, emerging markets suffer financial distress.
