Emerging markets must fix their economic woes
EVEN if emerging markets (EMs) finally climb back onto investors’ radar, it is not a reason to cheer as long as their economic woes are not fixed.
Government and central bank intervention in raising interest rates and implementing other short-term fixes may help for a while, but fundamental weaknesses need to be fixed for long-term resilience.
Otherwise, they will just wobble at the next slightest hit, and forever remain the playground of funds which tell different stories of their “attractive valuations” at different times.
Debt, in the form of cheap dollarbased loans, has grown by leaps and bounds in an era of easy money; the squeeze has come as US rates climb and liquidity is mopped up. EMs, which accumulated US$3.7 trillion in dollar-based loans from the first quarter of 2009 till today, are hit as their companies and governments have to make repayments in their weakening currencies.
Companies that have scant dollar reserves especially those in construction and real estate, find themselves in a tight corner when it comes to repaying dollar loans.
That is a major problem that Turkey is facing. As way back as 2011, 70% of the debt held by Turkish construction firms was in foreign currencies, economist Sebnem KalemliOzcan, University of Maryland, was quoted by the New York Times, as saying. Apart from the threat of rising US rates, Turkey was hit by US sanctions that further sank its economy.
The lira has slumped 40% against the dollar this year; inflation hit its highest at 18%, in 15 years. The Turkish central bank’s decision to raise the benchmark rate to 24% from 17.75% helped, in the meantime, to restore some confidence, in the lira.
But US-Turkish tensions are still not addressed; investors are wary of the independence of Turkey’s central bank, while the lira may drop further on mounting inflation and preference for foreign currencies.
India’s current account deficit, which widened to 2.4% of gross domestic product (GDP) in the second quarter, is expected to increase to 2.8% of GDP in financial year (FY) 2019 from 1.9% previously, says Nomura. Excessive dependence on oil and high imports of consumer items like smartphones have pushed up India’s import expenditure which includes capital goods as the economy strengthens. Financing for this deficit has become a worry as portfolio outflows intensified to US$8.1bil in the first quarter of FY19 from inflows of US$2.3bil in the last quarter of FY18.
The rupee, which is coming under pressure from a strengthening dollar and India’s widening current account deficit, has been the worst performing currency in Asia, losing about 12% of its value to date. News of potential government intervention had pushed up the rupee by the most in 18 months.
Indonesia’s current account deficit hit a four-year high in the second quarter, reaching 2.6% of GDP for the first half. In the first half, Indonesia recorded its first trade deficit in three years, of US$1.02bil. Amidst its reliance on foreign inflows to fund this deficit, Indonesia was hit with outflows of US$3.8bil this year.
The rupiah has dropped 10% to the dollar this year despite four rate hikes; policymakers plan to increase tourism receipts, greater use of biodiesel to stem expenditure on oil imports and come up with strategies relating to imports and exports. Despite an agreed US$50bil loan from the International Monetary Fund, the Argentine peso renewed its plunge after a brief recovery, on a continued crisis of confidence.
The Argentine peso has dropped 52% to the dollar this year, and continues falling despite raising its benchmark rate, for the fifth time, from 45% to 60%, which is the world’s highest.
The 12-month nationwide inflation is running at 34.4%; Argentina’s external debt to GDP rose to 57.1%, or US$320bil, most of which are dollar-denominated. Inconsistent policies, lack of reforms and falling trade flows are some of the urgent issues faced by Argentina. Many more emerging economies require fixing; funds chase after yields even if those economies may still be in a bad shape.
At the slightest drop of a hat, these shaky economies will be vulnerable to capital flight that leaves their markets substantially lower, investors poorer, currencies weaker and big gaps in the funding of deficits. Could the next round of turmoil be coming, with President Donald Trump readying to go ahead with another US$200bil of tariffs on Chinese imports, despite preparations for trade talks.
US’ August inflation may have risen less than expected, but inflation is expected to remain high due to effects from the trade war and rate hikes are still expected.