Emerging market central banks face a catch-22 where falling economic growth means they can’t maintain tight monetary conditions, but high inflation doesn’t allow them to stop rate hikes either.

The result is a growing risk of monetary policy error. Countries from Poland to Colombia, India to South Korea are walking a tightrope trying to figure out the exact level of borrowing costs that won’t cripple their economies but keep prices capped.

As long as the Federal Reserve continues to hike rates and Covid hobbles China, policymakers in poorer countries remain at the mercy of factors beyond their control.

Emerging markets have seen an exodus of investors this year despite rising interest rates at an unprecedented pace. Local sovereign bonds have plunged the most since 2009, and currencies have suffered the worst annual losses since Russia defaulted in 1998. While a rebound since October has mitigated that fall, smaller economies are not only one misstep from a real monetary crisis.

At least 15 emerging markets now have dollar debt trading at depressed levels. Central banks have raised interest rates, reducing liquidity for junk-rated countries. At least $80 billion has been withdrawn from emerging market debt funds this year. And the worst is not here yet. Governments in developing countries need to refinance $215 billion of emerging debt coming due in the next two years.

Increasing interest rates has not been very efficient. Hungary was the first to learn this bitter lesson. After one of the fastest tightening cycles in the world that saw the benchmark rate jump more than 21 times in 16 months, the eastern European country paused after a decision in September. But within days, it was forced back into a hawkish stance as inflation soared to its highest level since 1996, and its currency plummeted to a record low against the euro.

This situation brings the emerging world into a problematic situation with considerable uncertainty for 2023.