"Three South American Countries Face Rising Financial Instability Concerns Due to US Interest Rate Hike"

[Asia Economy Reporter Seo So-jung] Concerns have been raised that financial instability may increase in three South American countries due to the U.S. Federal Reserve's (Fed) policy interest rate hikes.

On the 27th, the Bank of Korea stated in its Overseas Economic Focus report, "As the U.S. interest rate hikes become more pronounced, the three South American countries?Brazil, Argentina, and Chile?may face increased risks of financial instability due to not only economic sluggishness but also high inflation rates, low fiscal soundness, and expanding political unrest."

According to the World Bank's forecast from January, the average economic growth rate of the three South American countries this year is expected to be 1.7%, significantly lower than last year's 6.7%.

In particular, Brazil, the largest economy in Latin America, has seen a sharp slowdown in economic growth since the third quarter of last year, and concerns about economic stagnation are growing this year as well. Ita? Unibanco, Brazil's largest bank, forecasts that Brazil's economy will contract by -0.5% this year.

Fiscal soundness is also weak. Last year, the government debt-to-GDP ratios of Argentina and Brazil were 85.2% and 90.6%, respectively, far exceeding the appropriate level (40%). With delayed economic recovery increasing pressure for expanded fiscal spending, fiscal soundness is expected to deteriorate further due to reduced tax revenues and rising interest expenses, thereby shrinking fiscal capacity.

Additionally, the three South American countries face heightened political risks this year, with important political events such as the presidential election in Brazil approaching. Political risks in these countries are considered higher compared to other emerging markets, and combined with fragile economic fundamentals, they are expected to further worsen future economic conditions.

The Bank of Korea's Asia-Pacific Economic Team stated, "Currently, there is no rapid outflow of foreign investment funds from these three South American countries, but the possibility of financial instability may increase amid the Fed's interest rate hikes," adding, "The recent possibility of Russia's default related to the Ukraine crisis is also a factor that raises concerns about financial instability in these countries."

This content was produced with the assistance of AI translation services.