The Fed won’t save emerg­ing mar­kets

Turkey, Ar­gentina and South Africa are in se­ri­ous trou­ble, caus­ing stocks to tum­ble

The Hamilton Spectator - - Business - JUSTIN LA­HART

When emerg­ing mar­kets run into trou­ble, the trou­ble can keep get­ting worse un­til the Fed­eral Re­serve rides to the res­cue. But what if the Fed never shows up?

The de­ci­sion by Turkey’s cen­tral bank on Thurs­day to sharply raise in­ter­est rates was just the lat­est sign of how unset­tled emerg­ing mar­kets have be­come. Fac­ing a deep slide in the lira and a steep run higher in in­fla­tion, the cen­tral bank felt com­pelled to lift rates to re­store in­vestor con­fi­dence—a risky gam­bit that boosted the lira but could fur­ther dam­age the econ­omy while invit­ing Pres­i­dent Re­cep Tayyip Er­do­gan’s ire.

It isn’t just Turkey: Ar­gentina and South Africa also are in se­ri­ous trou­ble. An in­fla­tion prob­lem is just one of the is­sues Mex­ico’s in­com­ing pop­ulist pres­i­dent will face. In­done­sia has an in­fla­tion prob­lem and lots of for­eign debt. And while it is pos­si­ble to view each coun­try’s woes as idio­syn­cratic, in­vestors aren’t see­ing it that way. Last week, emerg­ing-mar­ket stocks tum­bled into bear-mar­ket ter­ri­tory.

Part of the chal­lenge for emerg­ing mar­kets comes down to what the Fed is do­ing, and here the prob­lem takes on a fa­mil­iar hue.

The Fed has been rais­ing rates and, with the econ­omy grow­ing strongly and un­em­ploy­ment low, it seems likely to keep on rais­ing them. That in it­self wouldn’t be a prob­lem for emerg­ing-mar­ket coun­tries if their economies were pow­er­ing ahead. But in many cases growth is slow­ing, which, com­bined with higher fund­ing costs, makes for a dan­ger­ous mix.

The emerg­ing-mar­ket trou­bles in early 2016 shared a sim­i­lar dy­namic. The Fed had raised rates for the first time since the cri­sis in De­cem­ber 2015, and sig­naled an in­ten­tion to keep rais­ing them. But the con­vul­sions in emerg­ing mar­kets made the Fed wor­ried about the U.S. econ­omy and it de­layed fur­ther rate in­creases. That is sim­i­lar to what hap­pened in the late 1990s when the Fed raised rates, help­ing to set off a se­ries of emerg­ing­mar­kets crises cul­mi­nat­ing with the 1998 Rus­sian debt de­fault. The Fed ended up cut­ting rates in re­sponse.

But the Fed might not be de­terred this time. The cen­tral bank isn’t nearly as wor­ried about the U.S. econ­omy as it was in early 2016. U.S. fi­nan­cial mar­kets are less vul­ner­a­ble to an emerg­ing-mar­kets cri­sis to­day than they were in the 1990s.

There are fac­tors that could mute the im­pact of the Fed’s rate in­creases on emerg­ing mar­kets.

The U.S. and other de­vel­oped economies are do­ing well, so ex­panded ex­ports might pro­vide some emerg­ing-mar­ket coun­tries with a boost. China is adding fis­cal stim­u­lus, which also should help. But the risk is that those pos­i­tives won’t do enough to off­set the Fed, and bad as things for many emerg­ing mar­kets are now, they only get worse.


Turkey’s cen­tral bank de­ci­sion to sharply raise in­ter­est rates in­vites Pres­i­dent Re­cep Tayyip Er­do­gan’s ire.

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