Why some emerging markets are suddenly melting down
For several weeks, money has poured out of developing nations and into the U.S., causing the dollar to rise in value and the currencies of emerging markets to hit new lows.
Turkey has been at the center of the rout, but many other countries, including Argentina, Hungary and Indonesia, have been hit as investors dump riskier stocks and bonds for the safety of U.S. assets.
1. Why are emerging markets suffering?
This latest upheaval started when the U.S., Japan and Europe kept interest rates close to, or below, zero to help their stagnant economies recover from the 2008 financial crisis. That
made returns on stocks and bonds unattractive, and drove investors to developing nations, where the risks were higher but the payoffs more inviting.
Emerging markets, as a result, have enjoyed a rally in stocks, bonds and currencies. But the reverse is now happening as investors react to several signals from the U.S. -- faster growth, rising interest rates and a stronger dollar.
2. How scary can this get?
Harvard professor Carmen Reinhart, for example, has said mounting debt loads, trade battles, rising interest rates and stalled growth have made emerging markets more vulnerable than on the eve of the 2008 financial crisis.
3. What caused the Asia crisis?
It started when a real-estate bubble burst in Thailand, which undermined confidence in the economy, causing foreign investors to sell the currency and withdraw from the stock market. The crisis spread to the banks, and then across much of East Asia.
Many of the afflicted economies had strong growth records that masked weaknesses like nonperforming bank loans, heavy foreign borrowing and rising trade deficits.
Because their currencies were pegged to the dollar, South Korea and other nations were forced to spend billions trying to fend off speculators who were selling their currencies.
4. So is this another Asian-like crisis?
No, at least not yet. One reason: Investors are selectively punishing markets where policy makers haven’t done enough to stem deteriorating trade balances and ballooning inflation.
These include Turkey and Argentina, which have the worst combination of weak governance and high dollar debt among 18 major emerging-market economies. Brazil and Indonesia aren’t far behind.
5. Who else looks vulnerable?
Economies dependent on dollars and other foreign currencies to finance their trade deficits -- the Philippines, India and Indonesia stand out -- have the worst-performing currencies in Asia this year.
Those with the highest rates of foreign ownership of government bonds could be the most vulnerable to capital outflows, including South Africa, Indonesia and Russia.
6. Why is Turkey in so much trouble?
It’s been one of the hardest-hit emerging-market currencies, shedding more than 17 percent of its value against the dollar this year. Turkey has a large budget shortfall and one of the biggest trade deficits in the G-20 group of nations.
And though Turkey’s inflation rate is more than 10 percent, its central bank was prevented from raising interest rates by President Recep Tayyip Erdogan, who is seeking re-election in June and says he prefers low interest rates, based on his own ideas about monetary policy.
7. Why did so many countries borrow in dollars?
Encouraged by near-zero interest rates after the global financial crisis, developing nations loaded up on what was then cheap debt. Selling bonds denominated in dollars rather than the local currency also attracted investors who favored the more stable greenback.
Source: The Star
https://www.thestar.com.my/business/bus ... ting-down/