Even before the Turkey crisis, EMs were at pains to contain the financial turmoil that struck them amid the US Federal Reserve’s focus on tightening financial conditions.
Emerging currencies usually fluctuate depending on investors’ confidence in the ability of their governments to repay their foreign currency debt. Much of the Turkish lira’s plight may be home-grown, but it shares some key vulnerabilities with other EMs whose currencies are now also plunging as fear of contagion spreads, analysts say.
India, South Africa, Argentina, Mexico, Brazil and Russia have all seen their currencies plunge over the past week because, like Turkey, they remain heavily dependent on foreign capital, especially the dollar.
The rand and the rouble have both lost around 8% against the US currency over the past week, while Brazil’s real slipped 4%, and the Argentinean peso nearly 6%.
The Indian rupee hit record low on Monday.
Between March 1 and April 27, Argentina sold $8bn of reserves to arrest a run on the peso. That’s nearly 15% of its total FX reserves. As the peso slumped to a record low, the central bank this week jacked up its already highest-in-the-world interest rate by 5 percentage to a record 45% and pledged to keep it at that level at least until October.
Bank Indonesia raised interest rates by a total of 100 basis points since May and intervened in both the currency and the bond market to curb losses, draining what was a record stockpile of foreign reserves in January by about $14bn to $118bn in July.
Argentina and Indonesia may be extreme cases, but no emerging country can afford to be complacent. According to the Institute of International Finance, more than $900bn of EM bonds come due this year.
Is it like “emerging markets growth is faltering, end of story”? Not yet.
Optimists argue that most EMs are far less vulnerable than they were in 1997. Foreign currency holdings among EMs and developing economies are projected to be $144bn higher this year, according to the International Monetary Fund.
EM policy makers are also reacting better than in the past. Argentina’s move to defend the peso by hiking its key interest rate to 45% and committing to reducing its fiscal deficit exemplifies that.
The deeper problems in the EMs stem from the excessive financialisation of the global economy that has occurred since the 1990s. The resultant policy dilemmas – rising inequality, greater volatility, reduced room to manage the real economy – are seen continuing to preoccupy policymakers in the decades ahead.
Sure, Western central banks will no longer be pumping easy money. So, emerging economies must seek investment cash at home.
Without a significant home-grown investor base, supported by futuristic policy initiatives and structural reforms, countries risk a return to the old boom-bust cycles of the 20th century. And part of the challenge will be to rebuild macroeconomic buffers that have been depleted during years of fiscal and monetary stimulus.
