Spectrum of Contagion Keeps Many Investors in Emerging Markets

Dubai: The vulnerability of the emerging market exchange rate often includes many factors, including domestic economic conditions, the direction of portfolio investment flows and a large number of external factors such as trade barriers and the relative strength of the market. American dollar.

According to the Institute of International Finance (IIF), for example, the Argentine peso and the Turkish lira have had very different trajectories in the run-up to the liquidation, the peso canceling an earlier appreciation, while the pound continues to follow a similar pattern. trend. depreciation in progress for many years. "At this stage of the liquidation of emerging markets, the lira and the peso have depreciated more than necessary to offset macroeconomic imbalances and are undervalued. Indeed, in other cases where currencies were overvalued – India and South Africa – nominal depreciation reduced misalignment to virtually zero, "the IIF said in a recent note.

Analysts find that the severity of recent market developments has increased anxiety about potential contagion and here are some markets to watch.

turkey

The sharp devaluation of the Turkish lira following a series of macroeconomic policies and unconventional monetary policy decisions led to a fall of more than 40% in the currency and caused a wave of contagion in emerging markets. Increased political tensions between the United States and Turkey have clearly weighed on investor appetite for emerging market assets, exerting additional pressure on a wide range of emerging market assets and currencies. Contagion and spillovers have also been evident in cross-border portfolio flows. Economists and market analysts fear that the impact of the turkish crisis on many emerging markets will have longer-than-expected consequences for their currencies, asset classes and investment flows.

Argentina

Argentina, in the worst currency crisis in 17 years, has seen the peso fall more than 60% this year to become the worst emerging currency. In a desperate bid to support the currency and the economy, the country has recently called on developed countries to abandon the rules and buy sovereign debt from emerging markets on their reserves. Luis Caputo, president of the central bank, called on central banks to invest up to 2% of their reserves in countries with loans from the International Monetary Fund (IMF).

Argentina is in talks to speed up the disbursement of funds from a record $ 50 billion credit line (183.63 billion dirhams) with the IMF. The decline in the pesos worsened because of the government's ability to finance itself during the second recession in three years. The central bank raised the key rate to 60% last week to curb galloping inflation.

India

The Indian rupee has been in free fall since the beginning of this year, down 12% to become the worst performing Asian currency. While the macroeconomic fundamentals of the country can not be blamed in large measure by the rupee's woes, it is undeniable that the combination of external factors weighed on the currency.

For India, over-reliance on oil imports is its Achilles heel in foreign exchange management. Crude prices have risen from $ 65 to $ 80 since US President Donald Trump decided to cancel the Iran nuclear deal. India imports 70% of its crude oil requirements and any recovery in crude oil inflates the import bill and also affects the currency.

Indonesia

Indonesia is the largest economy in Southeast Asia and its debt is about forty percent denominated in foreign currency. Last week, the rupiah, the Indonesian currency, fell to its lowest level since the Asian financial crisis of 1998, having lost 10.5% against the dollar since the beginning of this year. The Indonesian central bank has raised interest rates four times since May and has intervened heavily to try to consolidate the rupee.

Brazil

Brazil, which is preparing for its presidential election next month, is facing a huge currency crisis as the real has fallen by nearly 30% this year as the Latin American economy continues to suffer from its worst recession.

South Africa

The rand, down 24 percent since the start of the year, fell sharply last week, with new data showing the South African economy went into recession last quarter for the first time since 2009.

Russia

The Russian ruble continues to fall as the dollar continues to gain ground on the emerging market currency basket. The geopolitical pressures linked to the resumption of the debate on the bill on the new US sanctions against Russia could give a bearish feeling for the currency this week, with a possible correction of the price of oil. The loss of the ruble against the greenback since the beginning of the year is above 17%.