By Andrea Shalal

WASHINGTON Emerging markets face a more volatile and uncertain future, and must rebuild fiscal buffers, boost revenues, diversify trade and gird for trillions of dollars in annual climate change costs, the International Monetary Fund's No. 2 official said on Friday.

IMF First Deputy Managing Director Gita Gopinath told the biennial conference of the South African Reserve Bank that external conditions had become more challenging for emerging markets due to rising geopolitical fragmentation, tough financial conditions and the growing costs of climate change.

"The pandemic and Russia's war in Ukraine have raised legitimate concerns about supply chain security and broader national security," she said in remarks prepared for the conference. Extreme weather events related to climate change could also result in huge long-term costs at a time when debt payments were already rising sharply, with some studies forecasting mitigation needed of $2 trillion annually by 2030.

In South Africa, for instance, the interest payments on public debt were expected to increase to about 27% of revenue by fiscal year 2028/29, from about 19% this fiscal year.

Gopinath said the IMF expected global interest rates to remain high for "quite some time," adding that rates might never return to the era of "low for long" given the possibility of more frequent adverse supply shocks.

She said the IMF was also keeping a close watch on a "disturbing" increase in the fragmentation of global trade, warning it could reduce the gross domestic product of most emerging markets, including South Africa, which could see losses of around 5% of GDP.

Some countries could see losses as high as 10% of GDP, she said.

Fragmentation of foreign direct investment would add to these costs, and could hit emerging markets hardest, reducing access to better technologies and know-how.

She said adoption of large-scale industrial policies that restricted trade - mostly in advanced economies - had increased nearly sixfold in 2023 alone. Almost 3,000 trade restrictions were imposed in 2022, three times as many as in 2019.

Greater tumult could occur in emerging markets given risks ahead, including structural rebalancing in China, she said, underscoring the need for countries to further strengthen monetary policy frameworks and protect the financial sector by incorporating climate-related financial risks.

Gopinath said emerging markets should work to mobilize higher domestic revenues by boosting tax collection rates, reinvigorating structural reforms and working to diversify trade flows, all while adopting a fiscally and socially sustainable climate strategy that included carbon pricing measures.

"The challenges may be daunting. But the opportunities are vast," she said. "EMs have shown considerable resilience over these past few years, and their potential to accelerate growth and raise living standards remains promising."

South Africa, she said, embodied this potential and was poised for "a growth take-off" given its natural endowments and strong institutions, if reforms were implemented to resolutely and courageously tackle structural obstacles.

(Reporting by Andrea Shalal)