By James McCormack, Fitch
The strength of the US dollar is the single most important issue of the many facing emerging market (EM) economies. At the same time – and in some cases as a corollary of the dollar’s strength – they are struggling with lower commodity prices, increasing rates of inflation, heightened political and geopolitical risks, greater financial market volatility, large capital outflows and an extended period of weakness in global trade.
It is critical to consider nominal dollar incomes in assessing countries’ relative economic performance and prospects because the dollar continues to dominate the pricing of global commodities, the settlement of international trade, the extension of cross-border credit and the foreign reserve assets held by EM central banks. Although the international roles of several other currencies, including the Chinese renminbi, are expanding, there is no convincing evidence that the dollar’s supremacy is under any immediate threat. Read more
The decline in global foreign exchange reserves thus far in 2015 may add to macro-economic pressures on emerging markets (EM), but it does not directly risk a “quantitative tightening” effect on developed markets (DM).
EM sovereign foreign exchange reserves fell by US$189bn between end-December 2014 and end-June 2015, according to IMF and Chinese data compiled by Fitch. The biggest declines were in China (down US$149bn) and Saudi Arabia (down US$60bn), partly offset by increases in other countries, led by India (up US$35bn). More timely data from some countries, including notably China suggest the drain continued in July and August.
Fitch estimates about US$100bn of the decline to June may have been caused by valuation effects, based on the 4.3 per cent trade-weighted appreciation of the US dollar in the first half of the year. Nonetheless, some of the decline will reflect genuine draw-down by EM central banks. Read more
By Richard Samans, World Economic Forum
“Are emerging markets already mired in a ‘crisis’,” the FT asked this week. The word is starting to surface, it noted. Economic growth slowed, global demand slumped, and trade plateaued, in recent months and years.
But leading emerging markets (EMs) such as China, Brazil and South Africa can still avert a real crisis. To do so, they would do best to broaden their attention beyond traditional measures of GDP growth to specific drivers of social expectations. They may find a more diversified strategy for growth itself along the way.
While news reports recently zoom in on the currency, debt, and stock markets woes in emerging markets, EM governments may worry about popular discontent at home more. From the BRICS over to Chile and Turkey to Indonesia, governments as of late are grappling with demands for wider social inclusion. Read more
By Pablo Cisilino, Stone Harbor Investment Partners
After two years of low returns and high volatility, investors are questioning the thesis that supports investing in local currency debt from emerging markets. Notwithstanding the current cyclical factors that, in the short term, seem to support the US dollar, we believe the main structural features that make most emerging markets and currencies an attractive investment destination are still in place.
Some of the most important factors include cleaner sovereign balance sheets and demographic profiles that favour younger workforces and growing populations. In our view, the re-pricing of the asset class over the last couple of years has created considerable value. Read more
Whenever some hapless country has a debt crisis these days, rescue negotiations with the International Monetary Fund (IMF) and other lenders are often enlivened by rumours and speculation that Russia and/or China will ride in to save the day.
The latest subject of such conjecture is Greece, currently conducting combative talks with its eurozone government creditors about trading off fiscal space and debt relief for implementing structural changes. Such speculation, though, has so far almost entirely been disproved, and so it will very likely be in this case.
Like Iceland, Pakistan and Cyprus before it, Greece simply cannot offer enough to either China or Russia to be worth the money and geopolitical turmoil involved. EM governments are still a long distance from supplanting the crisis-fighting role of the advanced economies and the multilateral institutions. Read more
One of the few African proverbs that appears to exist other than in the minds of journalists searching for an intro is: “When the elephants fight, the grass suffers”.
Recently, the gyrations in the mastodonic major currencies have placed pressure on the EM countries maintaining pegs or ceilings or otherwise actively managing their easily-trampled exchange rates.
For those targeting the euro, the fall in the single currency after the European Central Bank embarked on QE has increased the challenge in holding their exchange rates down. For economies with dollar pegs, the question is rather whether they can stand the overall loss of competitiveness entailed in following the US currency upwards. For the moment, though, it seems unlikely that a large number of pegs will come undone or ceilings be destroyed. Read more
Fears over “original sin” are once again stalking emerging markets (EM). As the US dollar surges against most EM currencies, a multi-year EM binge on US dollar debt is morphing into an inevitable hangover.
As the chart below shows, the international borrowings of many developing countries have vaulted higher since the 2008 financial crisis. A significant portion of these debts are in US dollars, setting up scenarios for “original sin” – in which the dollar debt servicing requirements far exceed borrowers’ direct ability to generate dollar revenues. Read more
By Paul McNamara, GAM
Events in recent months have given rise to some of the best opportunities in emerging market (EM) currencies that we have seen for some time. Following the sharp fall in commodity prices in the fourth quarter of 2014, the currencies of a number of commodity producers struggled.
These developments appear to have triggered a broader sell-off in EM currencies, with those that should benefit from lower commodity prices, such as the Indian rupee, Turkish lira, Mexican peso and Polish zloty, weakening as well. We believe these moves provide the key opportunities for 2015. Read more
Emerging Asia is set to be the world’s fastest-growing region again in 2015, skirting the contagion from Russia’s crisis and riding the fall-out from weak commodity prices, according to Fitch, the credit rating agency. Nevertheless, structural frailties stalk seven out of 10 countries in the region, with surging debt levels a particular concern, the agency said.
The region, excluding China, is expected to expand by 5.9 per cent in 2015 and 6.1 per cent in 2016 – compared to an average for global emerging markets of 4.1 per cent and 4.5 per cent respectively, Fitch said in a report. These forecasts compare with the International Monetary Fund’s (IMF) estimates that developing economies would this year grow at 4.3 per cent, accelerating to 4.7 per cent in 2016. Read more
By Jan Dehn, Ashmore Group
As the Fed prepares to hike rates in 2015, the window of opportunity presented by hyper-easy monetary policies for developed economies to undertake deeper fundamental reforms is rapidly closing.
So far, hardly any progress has been made. President Obama’s tenure has not seen the country’s economic problems solved. US trend growth has halved since the 1960s, while the debt stock has doubled to more than 350 per cent of GDP (not counting the further 300 per cent of GDP in unfunded social care liabilities). Europe and Japan recently re-engaged in QE-type stimuli to defend their fundamentally challenged economies from the effects of higher US rates in the future. Read more
By Sergio Trigo Paz and Gerardo Rodriguez, BlackRock
Periodic phases of market volatility this year have brought back painful memories of emerging markets (EM) crises. Some of these crises – particularly those associated with US monetary policy tightening in 1994 and 1999 – caused significant damage to emerging economies and their asset prices.
But those difficulties brought a hidden blessing. The crises taught countries that their misfortunes were caused not so much by the actions of the US Federal Reserve as by the lack of policy buffers and financial flexibility in their home markets. This realisation has helped foster an improvement in the overall framework of EM macroeconomic policies. Read more
“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”
For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.
But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more
And so the fall in emerging market currencies continues. Over the past month, the third episode of taper tantrum has pushed exchange rates down almost across the board against the dollar, bringing with it the now familiar round of hand-wringing about the vulnerability of emerging economies.
Once again, however, at least as far as currencies are concerned, the latest bout of weakness falls somewhat short of full taper tantrum catastrophe. The depreciation of emerging market exchange rates looks a lot like a subset of the sharp appreciation of the dollar, which has also shot higher against the yen and the euro, than it does a weakness of the entire asset class. Read more
As beyondbrics noted early this month, the recent “dollar surge” and rising US interest rates are already having an impact on EM currencies. Two weeks later and the effects are becoming more pronounced, as the charts below show.
First, US interest rates. This is the yield on 10-year US Treasury bonds this year.
Source: S&P Capital IQ
If the recent recovery in emerging markets has calmed your nerves somewhat, then steel yourself: EM crises are here to stay. That’s according to Joseph Capurso, currency strategist at Commonwealth Bank of Australia.
The good news? EM crises don’t always mean a regional or global recession. In fact, they are rather common, and their impact can be limited. So here are the five facts you need to remember in the next EM crisis (which should be rather soon, in fact). Read more
Raghuram Rajan, governor of the Reserve Bank of India, accuses policy makers in the developed world of lacking co-ordination. But how do EM central bankers stack up and how will their behaviour shape investment decisions?
“You have to be selective this year,” says Michael Ganske, head of emerging markets at Rogge Global Partners, a fixed income fund with $59bn under management – and the selection process begins with an assessment of a country’s economic fundamentals and the credibility of its financial policy makers.
With that in mind, here is a beyondbrics rundown of the guiders, the reactors and the mavericks at key EM central banks currently battling turmoil on financial markets. Read more
Forint hits 2-year low to the dollar
That’s the forint over the last three years to the euro. On Friday, it came under renewed pressure as seveal other emerging market currencies stabilised after a week of turmoil. Read more
Currency markets like rate rises. But half-hearted central bankers, or those without political support, can easily be overwhelmed by currency traders. James Mackintosh, investment editor, explains why India has succeeded where Turkey and South Africa have failed.
After the Argentine peso depreciated sharply at the end of last week, talk has begun of a wider EM rout. Once engines of growth for the global economy, emerging markets are now seen as vulnerable with signs of weakness emerging in the Chinese economy and the US Federal Reserve reeling in its asset purchase programme, adding to domestic woes.
While the spotlight was on Argentina on Friday, how unstable are markets in India? Read more