Emerging economies hit hard by declining demand for commodities

WASHINGTON The damage spans globe.

Thailand’s baht. Kazakhstan’s tenge. South Africa’s rand. Peru’s nuevo sol.

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 per cent, Friday on top of a 358-point drop Thursday. Tokyo’s Nikkei index shed 3 per cent 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 slowed, and its currency, the nuevo sol, has plunged 2.5 per cent 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 per cent the past month and more than 30 per cent 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 per cent economic growth this year, down from 4.3 per cent 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 per cent 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 per cent this year.

Emerging markets were already feeling the squeeze last week, when China devalued its currency, the yuan. That 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.

South Africa is battling labour strife. Brazil is contending with a corruption scandal at state-owned oil giant Petrobras. Turkey is struggling to form a government while its military battles the Islamic State extremist group and Kurdish separatists.

Adding to the pressure: America’s Federal Reserve is expected, perhaps at its September meeting, to raise the short-term rate it controls from near zero. Investors could respond by moving even more money out of emerging markets to seek higher U.S. rates. That would lift the dollar higher and push emerging market currencies even lower.

A Fed rate hike could also squeeze emerging market companies that have borrowed in U.S. dollars.

Brazil, South Africa, many countries are commodity exporters, and the final destination is all going to China.