Five effects of rising Fed rates

Ecuadornews:

Ecuador’s relationship with the United States is so important that any sneeze of the world’s largest economy causes influenza in national businesses.

The decision of the Federal Reserve (Fed) to raise interest rates a quarter of a point to the range of between 1.75% and 2% will bring consequences. And more when the US central bank anticipated that it will accelerate the pace of monetary adjustment, with two additional increases before the end of 2018.

USA is the first commercial partner of Ecuador. This goes around 28% of the exportable supply of the country. Everything is exported, from oil, to bananas, shrimp, tuna, and cocoa. And it is the reference market for the prices of crude oil, cocoa, coffee.

The effects in Ecuador can be several.

More expensive credits.

1. If a company (or a person), from Ecuador has an external credit, linked to a variable reference rate, such as Libor or Prime, you will feel an increase in your monthly payments when you pay the loan. It is common for companies exporting bananas, shrimp and other products to be financed abroad.

Less opportunity

2. The Government of Ecuador, due to its low liquidity, is seeking to acquire external debt through bonds and multilateral organizations and will have to pay a higher rate when it accesses these financing.

Money pays more

3. When raising rates, the yields of money rise in US banks, so that big investors prefer to keep their money safe in these entities before investing in high-risk or underdeveloped economies, such as Ecuador.

The dollar yields more

4. Higher interest rates make the greenback pay more, so savers and investors (both physical and institutional) are tempted to buy more dollars (to change their investment position) and that could generate a strengthening of the dollar. As a result, Ecuadorian products abroad will become more expensive, since importers would need more dollars to acquire the same good.

It is better to import

5. A stronger dollar pays more to Ecuadorians who travel to non-dollarized countries, as local currencies depreciate. (I)

Source: http://www.expreso.ec/economia/impuestos-deuda-comercio-creditos-dolar-MG2228248