Sink­ing cur­ren­cies point to jit­ters about emerg­ing economies

The Pak Banker - - BUSINESS -

The dam­age spans the globe. In emerg­ing mar­kets world­wide, cur­ren­cies are plung­ing over fears that de­vel­op­ing economies are on the verge of a crip­pling fall. Suc­cess sto­ries un­til re­cently, emerg­ing economies are seen as ca­su­al­ties now - of slower growth in China, plung­ing prices for com­modi­ties like oil and iron ore, the prospect of higher U.S. in­ter­est rates and home­grown threats.

The dam­age has spilled across oceans, with the tur­moil jolt­ing in­vestors in New York, Tokyo and Europe. In­vestors there worry that China and other ma­jor emerg­ing economies will re­duce their im­ports. They also fear a trade-dis­rupt­ing cur­rency war as some coun­tries des­per­ately lower their cur­ren­cies' value to gain a com­pet­i­tive edge. A lower-priced cur­rency makes a coun­try's goods cheaper for for­eign­ers.

The Dow Jones in­dus­tri­als plunged 530 points, more than 3 per­cent, Fri­day on top of a 358-point drop Thurs­day. Tokyo's Nikkei in­dex shed 3 per­cent Fri­day.

For all the mar­kets' jit­ters, many econ­o­mists say they re­main con­fi­dent that the U.S. econ­omy is re­silient enough to with­stand a slow­down in the de­vel­op­ing world. And Europe's econ­omy ap­pears to be emerg­ing from its long slump.

Even so, the trou­ble in emerg­ing mar­kets is a sur­pris­ing and un­set­tling re­ver­sal.

"It's re­mark­able just how things turned around so quickly," says Neil Shear­ing, an economist at Cap­i­tal Eco­nom­ics and a for­mer Bri­tish Trea­sury of­fi­cial.

Con­sider Peru. Three years ago, its cap­i­tal, Lima, was cho­sen to host an In­ter­na­tional Mon­e­tary Fund's meet­ing of global fi­nance of­fi­cials in what was seen as a cel­e­bra­tion of Latin Amer­ica's ar­rival in the eco­nomic big leagues.

But with the event six weeks away, Latin Amer­ica's out­look has de­scended from boom to gloom. Peru's econ­omy has steadily slowed, and its cur­rency, the nuevo sol, has plunged 2.5 per­cent against the U.S. dol­lar in the past month.

And Peru boasts one of the re­gion's health­i­est economies. Brazil's econ­omy is ex­pected to shrink this year and next. Its cur­rency, the real, is down 7 per­cent the past month and more than 30 per­cent the past two years. The Mex­i­can peso closed Fri­day at a record low against the dol­lar.

It's hardly just Latin Amer­ica. Kaza­khstan's cur­rency plum­meted this week af­ter the gov­ern­ment de­cided to let it trade freely. The South African rand fell this week to a 14-year-low against the U.S. dol­lar. Tur­key's lira hit a record low against the dol­lar this week.

Hung Tran, an ex­ec­u­tive man­ag­ing di­rec­tor at the In­sti­tute of In­ter­na­tional Fi­nance, ex­pects de­vel­op­ing coun­tries to post 3.8 per­cent eco­nomic growth this year, down from 4.3 per­cent in 2014. The in­sti­tute is on the verge of cut­ting that forecast fur­ther. An­a­lysts point to a pri­mary cul­prit: "It's all com­ing from China," says Masamichi Adachi, an economist with JP Mor­gan Chase in Tokyo. "Brazil, South Africa, many coun­tries are com­mod­ity ex­porters, and the fi­nal des­ti­na­tion is all go­ing to China."

The Chi­nese econ­omy is slow­ing more sharply than most peo­ple had ex­pected from the dou­ble-digit growth rates of the mid-2000s. The world's sec­ond-big­gest econ­omy is ex­pected to grow 7 per­cent this year, which would be its slow­est pace since 1990.

Bei­jing is try­ing to man­age a tran­si­tion from rapid growth based on ex­ports and of­ten-waste­ful spend­ing on fac­to­ries, real es­tate and in­fra­struc­ture to slower, stead­ier ex­pan­sion based on con­sumer spend­ing.

That tran­si­tion means China would need fewer raw ma­te­ri­als - Chilean cop­per, Nige­rian oil, Brazil­ian iron ore. That helps ex­plain why China's pull­back has loosed car­nage in global com­mod­ity prices: The Stan­dard & Poor's GSCI com­mod­ity in­dex, which tracks 24 com­modi­ties prices, is down nearly 20 per­cent this year.

Emerg­ing mar­kets were al­ready feel­ing the squeeze last week, when China de­val­ued its cur­rency, the yuan. That step ig­nited a semi-panic.

"The de­val­u­a­tion is a red flag about China's cur­rent eco­nomic sit­u­a­tion," says Kurt Bray­brook, who runs a Shang­hai com­pany that does qual­ity con­trol work. A fall­ing yuan raises the risk that other coun­tries will de­value their cur­ren­cies to catch up.

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