World Bank Says Possible Big Capital Outflows Under U.S. Federal Reserve Rate Hike May Affect Emerging Countries

The World Bank issues warning to developing countries likely to be affected by the upcoming US Federal Reserve price hike. A looming result to this is the possible decline in capital flows of emerging countries.

BBC forecasts on Monday that the upcoming US monetary policy-tightening will have "a modest impact on developing countries," as per new report from World Bank. However, international financial institutions also warn that "there is some risk that it could be worse."

According to a new research conducted by the World Bank, the smooth tightening cycle expected from the U.S. Federal Reserve posits that "the reduction in capital flows to emerging economies could be substantial."

"Risk are compounded by recent spikes in volatility in global financial markets and deteriorating growth prospects in developing economies," says World Bank's Development Prospects Group Director Ayhan Kose, according to Xinhua Net's report on Wednesday.

Kose goes on, "An abrupt change in risk appetite for emerging market assets could become contagious and affect capital flows to many countries."

Meanwhile, the US Federal Reserve is certain that it will raise the interest rates at some point as the economy tries to improve, given that the "US interest rates have been practically zero for more than six years."

On the other hand, a 45 percent cut on the annual capital inflows of emerging countries could be a result of a one percent increase in US, euro, UK and Japanese, Reuters reported on Tuesday.

"Emerging and frontier market economies may hope for the best during the upcoming tightening cycle, but given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy," says one of the paper's authors, Carlos Arteta.

The two-day policy meeting of the US Federal Reserve is slated to start on Wednesday.