By: Pedro Santiago – Forex Focus
Emerging-market currencies continue to sell off, with analysts expecting more weakness in the near-term.
Turkey’s official currency, the lira, has been at the forefront of global news for the last couple of months. While speculations are running rife that the ongoing conflict in Syria is leading the United States to up its ante against Turkey, which is caught in a Catch-22 situation when it comes to choosing sides between the two superpowers, others argue that the country’s fundamentals have been deteriorating for a while now, and it was only a matter of time before the economy headed for doomsday. In the meantime, Turkey’s currency has regained some ground in September after sliding to $7.0831 versus the US dollar in mid-August, a drop of almost 100 percent over eight months this year after the currency settled at $3.7956 last December 31.
The sharp slide in the lira has also led to some amount of nervousness among investors in emerging markets, with Asian currencies from the Chinese yuan to the Indonesian rupiah and the Indian rupee all affected and continuing to slide, especially against the greenback. In other emerging markets, the Argentinian peso has performed even worse when compared to the lira, with the official currency of the South American country dropping more than 100 percent this year alone. The peso, which settled at $18.593 against its US counterpart on December 29 of last year, spiked to $36.799 versus the dollar at the end of August this year. The South African rand, one of the most widely traded emerging-market (EM) currencies, has also had a dismal 2018; and with the economy slipping into recession in the second quarter of this year for the first time since 2009, the fate of the currency can only worsen going ahead.
With the leading EM economies gasping for breath, there is talk that the ongoing crisis could lead to another global financial meltdown akin to the Asian financial crisis in 1997. In the meantime, countries such as Argentina are seeking assistance from the International Monetary Fund (IMF) to bail them out; and although the lender of last resort has agreed to a loan of $50 billion to shore up the economy, the assistance comes with its own set of austerity measures such as reducing the fiscal deficit, which could lead to economic growth slowing. On the positive side, however, the money could be used to bolster assets that have seen a sharp decline in value in the past few months due to a global sell-off by investors in emerging markets. According to the MSCI Emerging Markets Index, which measures the value of equities traded in these markets, share values have plunged by more than 20 percent since the start of this year.
Coming back to Turkey, the country’s economy expanded at 0.9 percent in the second quarter of this year following a 1.5-percent growth in the first quarter. But the biggest concern has been Turkey’s inflation, which has skyrocketed from an annual rate of 10.35 percent in January of this year to 17.9 percent in August, registering the largest increase in the country’s inflation rate since December 2003. Excluding alcoholic beverages and tobacco, for which the inflation rate is 1.81 percent, inflation across most sectors is in the 15-25 percent range, with annual core inflation in August jumping to 17.22 percent from 15.10 percent the previous month. The other concern is the unemployment rate, which is close to 10 percent, way higher than any of its European counterparts and hovering close to the 2010 highs of 10.8 percent reported in January of this year.
According to analysts, Turkey’s economy has not been in touch with reality, as cheap credit and a low interest-rate regime fuelled rapid growth; while on the flip side, it led to a surge in inflation and massive accumulation of foreign debt due to cheap loans. But with interest rates in the United States beginning to rise, the loans too dried up, leaving the country with few alternatives to shore up capital. To add to the country’s economic woes, the US in August slapped sanctions on members of the Turkish government in addition to doubling steel and aluminium tariffs to 50 and 20 percent respectively—triggering anger among officials in Turkey, who termed it political retribution for holding an American pastor in the country on terrorism charges, and calling on other nations to form a united front against President Donald Trump’s administration.
Russia, Iran and Turkey recently concluded a trilateral summit during which the countries have more or less agreed to sidestep the greenback and use their national currencies for transactions involving bilateral trade. Although the talks are still at an initial stage—and it’s a little early to gauge how such an arrangement can be carried forward and the potential outcome of curbing the use of the US dollar, even if it transpires into reality—the idea itself could have far-reaching effects, especially if China, the only other country that is capable of countering the US, joins the bandwagon. But for now, emerging markets are likely to experience more pain as a combination of higher US interest rates, market uncertainty and trade tensions lure investors into exiting from some of the vulnerable markets and heading right back to the US, where the economy is continuing on a path of rapid expansion.