Here comes that fa­mil­iar fail­ing as fears of a cur­rency cri­sis resur­face

The Sunday Telegraph - Money & Business - - Business -

On Wed­nes­day, protests brought the streets out­side congress in Buenos Aires to a vir­tual stand­still. “Peo­ple were un­happy about the rises in util­ity prices and pub­lic trans­port,” says Joe Fo­ley. “They were try­ing to get them over­turned.”

Once a res­i­dent of Pre­ston, near Manch­ester, Fo­ley now works for the city’s tourist board and has lived in Latin Amer­ica’s third largest econ­omy for over seven years.

“It’s amaz­ing how the at­mos­phere can change in just a few weeks,” he says. Peo­ple were feel­ing qui­etly op­ti­mistic about the econ­omy just a month ago, Fo­ley ex­plains. But the coun­try’s plea for fi­nan­cial sup­port from the In­ter­na­tional Mon­e­tary Fund, the global lender of last re­sort, has re­vived old fears.

In­fla­tion is once again get­ting out of hand. It has trig­gered a sud­den out­flow of money from the coun­try as in­vestors lose heart. On May 4, the cen­tral bank re­sponded by rais­ing in­ter­est rates to 40pc. It was the third hike in a week.

Ar­gen­tines are used to high in­fla­tion. When they nip out to get a pint of milk they, and the farm­ers pro­duc­ing it, know it will most likely be worth about a dol­lar.

In the past few years, a rate of well over 20pc has be­come nor­mal. But these rules of thumb are no longer hold­ing. The cur­rency de­val­u­a­tion threat­ens to be­come a mini cri­sis.

The emerg­ing mar­ket’s cur­rency has lost close to 20pc of its value against the US dol­lar this year, with a dol­lar now worth close to 23 pe­sos. Mex­ico, 1994 Also known as the “Tequila Cri­sis”, the Mex­i­can peso lost 15pc of its value overnight, and trig­gered a clas­sic ex­am­ple of cap­i­tal flight. Trade lib­er­al­i­sa­tion

Rus­sia, 1998 Con­ta­gion ef­fects from the Asian cri­sis and poor eco­nomic man­age­ment caused a col­lapse in con­fi­dence. An­nual yields on ru­ble de­nom­i­nated bonds hit led to an in­flux of in­ward for­eign in­vest­ment, mostly via highly liq­uid stocks and bonds. GDP shrank by 6.2pc, short-term in­ter­est rates reached 71.5pc. It re­quired a $50bn IMF bail-out.

200pc as debt re­pay­ments were funded by sell­ing off for­eign ex­change re­serves. This added to ru­ble weak­ness and led to mass debt de­faults. The ru­ble was floated and out­put fell by 4.9pc. The milk is get­ting pricier, fast. Ef­forts from the gov­ern­ment, led by Pres­i­dent Mauri­cio Macri, aim to wean the coun­try off highly sub­sidised rates for pub­lic trans­port and gas. Up­ping train tick­ets by close to 35pc has also had a com­pli­cat­ing ef­fect on in­fla­tion.

An­other gam­ble has been Ar­gentina’s 100-year bond. It was a much vaunted way to at­tract for­eign in­vest­ment un­der Macri’s more mar­ket-palat­able regime of eco­nomic re­form – led by slash­ing pub­lic spend­ing and set­ting an in­fla­tion tar­get of 15pc. It reached 105pc of its face value late last year. De­spite Macri’s best ef­forts, it is now trad­ing closer to 85pc.

There are now grow­ing con­cerns over an over­heat­ing US econ­omy. The mas­sive Trump regime tax cuts could cause prob­lems for other emerg­ing mar­kets. Quicker-than-hoped in­ter­est rate hikes from the US Fed­eral Re­serve are of­ten bad news for some emerg­ing mar­kets which, as Ar­gentina does, still hold sub­stan­tial amounts of debt in dol­lars and may not have much by way of for­eign cur­rency re­serves.

In Ar­gentina, this ef­fect has been enough to scare many in­vestors into mov­ing their money else­where, trig­ger­ing cap­i­tal out­flows.

Ar­gentina is not alone among emerg­ing mar­kets in see­ing in­fla­tion ramp up as fears of in­ter­est rate hikes have spooked mar­kets.

There’s a sig­nif­i­cant dif­fer­ence in the ap­proaches of gov­ern­ments, how­ever.

While Ar­gentina has hiked rates, Turkey’s pres­i­dent, Tayyip Er­do­gan, de­scribes him­self as an “en­emy of in­ter­est rates”, dash­ing hopes that the Turk­ish cen­tral bank might as­sert its Asia, 1997 The “Asian Flu” fol­lowed a gold rush of in­vest­ment into emerg­ing mar­kets. Bad loans, a hike in US in­ter­est rates and then in­vestors sud­denly pulling out of mar­kets

Ar­gentina, 2001 Neg­a­tive growth from 1998 was com­pounded by gov­ern­ment over­spend­ing, and other cur­rency crises upped bor­row­ing costs. A per­fect storm of cur­rency, sov­er­eign debt in­clud­ing In­done­sia and South Korea, scarred City mem­o­ries. Faith fell in each coun­try and the dol­lar rose 87pc against a bas­ket of Asian cur­ren­cies. Mar­kets took a record bash­ing.

and bank­ing crises be­gan. Spreads be­tween US and Ar­gen­tine gov­ern­ment bonds reached 5,000 ba­sis points. The IMF cut off funds and 24 peo­ple died in protests. The na­tion de­faulted. in­de­pen­dence. There were signs that as the lira lost 13pc of its value and touched a new record low against the dol­lar, Er­do­gan might have be­gun to face the re­al­ity of in­fla­tion­ary pres­sures.

He called a cri­sis meet­ing on Wed­nes­day with key eco­nomic ad­vis­ers but that brought only a vague state­ment about bring­ing the forces of in­fla­tion and in­ter­est rates into line.

Un­like Er­do­gan who has his sights on re-elec­tion, Macri has acted swiftly, cross­ing what many in Latin Amer­ica re­gard as a po­lit­i­cal Ru­bi­con.

After hik­ing in­ter­est rates, he turned to the In­ter­na­tional Mon­e­tary Fund for sup­port.

Fund­ing is ex­pected to come in the form of a standby ar­range­ment, which has stricter lend­ing con­di­tions, but al­lows for greater sums and lend­ing pe­ri­ods than the flex­i­ble credit line that was orig­i­nally mooted.

The IMF is a bo­gey­man in Ar­gentina. Macri’s move may well calm mar­kets and in­vestors, but it will threaten his po­lit­i­cal sup­port.

The eco­nomic cri­sis of 2001 was dev­as­tat­ing, rav­aging the pros­per­ity of even mid­dle class work­ers, as the vast in­jec­tion of IMF sums failed to be matched by sound man­age­ment.

It is widely ac­cepted that the cause of the cri­sis was the de­ci­sion to peg the peso to the dol­lar, in what was termed the con­vert­ibil­ity regime.

In 2001, the IMF pulled the plug and the coun­try went bust. It has since is­sued hand-wring­ing mea culpa pa­pers on what went wrong.

But the legacy of the Ar­gen­tinian de­fault is still fresh in the minds of its peo­ple.

With the cap­i­tal mar­kets closed, liq­uid­ity must come from the IMF again, ex­plains Martin Castel­lano of the In­sti­tute of In­ter­na­tional Fi­nance.

Ar­gentina is short on re­serves and lacks the flex­i­ble lines of credit granted to the bet­ter es­tab­lished econ­omy of Mex­ico or the sov­er­eign fund of Chile, says Castel­lano, who spent a decade at Ar­gentina’s cen­tral bank from 1999 to 2010.

“Com­pared to 2001 I think it’s a to­tally dif­fer­ent sce­nario,” he says. The fun­da­men­tal dif­fer­ence is that the fi­nan­cial sec­tor in Ar­gentina now mostly op­er­ates in pe­sos.

“In 2001, it was a dol­larised sys­tem, with 80pc of the mort­gage mar­ket op­er­at­ing in dol­lars. Now the sys­tem works mostly in pe­sos,” Castel­lano says.

Macri is also con­sid­ered to be a cred­i­ble leader of an eco­nom­i­cally sound regime by many in­vestors.

Al­berto Ramos of Gold­man Sachs be­lieves that ne­go­ti­at­ing an IMF pro­gramme was the right pol­icy move.

“It will likely al­low the au­thor­i­ties to con­tinue down a path of grad­ual fis­cal ad­just­ment with­out be­ing ex­posed to shocks to ex­ter­nal fund­ing con­di­tions,” he says. Other big cap­i­tal is no longer flow­ing as quickly to some of these economies, peo­ple start to fo­cus on the next struc­tural com­po­nents such as a cur­rent ac­count deficit and start to take fright.”

Mcdon­agh sees, as other ob­servers, a marked dis­tinc­tion be­tween Ar­gentina and Turkey.

Where Er­do­gan’s poli­cies have am­pli­fied risks, Macri has tried to ad­dress them.

Mcdon­agh said: “The in­sti­tu­tional qual­ity in Turkey is not as high as it was back then [in the 2000s].”

Old rules, where a stronger dol­lar weak­ened cur­ren­cies in emerg­ing mar­kets, still ap­ply to an ex­tent, but fun­da­men­tal dif­fer­ences mat­ter.

In­vestors with long-term in­ter­ests in emerg­ing mar­kets are more likely to keep faith if ad­min­is­tra­tions are pre­pared to put their pop­u­la­tions through short-term dis­com­fort, econ­o­mists ar­gue.

The strug­gles in Ar­gentina and Turkey may have killed some of the buzz in emerg­ing mar­kets, but it is not a widespread cri­sis – yet.

“It is dif­fer­ent [in Ar­gentina] this time,” Castel­lano says.

“There is now a broader set of in­stru­ments to pro­vide sta­bil­ity to the mar­ket.

“But the po­lit­i­cal op­po­si­tion will make Macri pay a sig­nif­i­cant price as a re­sult of reach­ing out to the IMF.”

Emerg­ing mar­ket strife A his­tory of tur­moil

The Turk­ish lira, left, has plunged in value against the dol­lar this year; main, at­tempts at eco­nomic re­form in Ar­gentina have led to protests in Buenos Aires

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.