Financial Turmoil in Emerging Markets

Argentine families are trying to cope with 30% inflation. Companies in Turkey face bankruptcy if they can’t pay off soaring debt costs. And investors who bet on emerging markets will be deep in the red this year.

Financial turmoil has engulfed many developing countries this year as investors worry about the impact of rising interest rates and trade disputes on these fast-growing—but often fragile—economies, AP reported.

Argentina has seen its currency slide by more than half this year, while Turkey’s lira has fallen almost as much. The currency drops have shaken confidence in some stock markets, with Indonesia’s index tumbling 4% Wednesday.

The worry is that big losses in some developing markets could ripple out into the global financial system, as they have in the past, notably in the late 1990s, when several Asian countries eventually required financial rescue.

According to specialists at Ashmore Investment Management, volatility in emerging markets is at its highest since the global financial crisis a decade ago, which showed how trouble in one part of the world economy can spread.

The exchange rate vulnerability of emerging markets often comprises many factors ranging from domestic economic conditions, direction of portfolio investment flows and a large number of external factors such as trade barriers and the US dollar.

According to the Institute of International Finance, in the run-up to this sell-off, for example, Argentina’s peso and the Turkish lira had markedly different trajectories, with the peso unwinding a previous appreciation, while the lira continues a trend depreciation that has been ongoing for many years.

Analysts see the severity of recent market moves has increased anxiety over possible contagion and here are a few markets to look out for.

Turkey

The sharp devaluation of the Turkish lira following a series of unconventional macroeconomic policies and monetary policy decisions has seen the currency plunging more than 40% year to date and sending the shock waves through global financial makers spreading a specter of a contagion across emerging markets.

Economists and market analysts fear that the reverberations of the Turkish crisis felt across many emerging markets will have longer than expected consequences on their currencies, asset classes and investment flows.

Argentina

Argentina, reeling from its worst currency crisis in 17 years, has seen the peso falling more than 60% this year to become the worst among the emerging market currencies.

Luis Caputo, the Argentine central bank president, called on central banks to invest as much as 2% of their reserves in countries with loan packages from the International Monetary Fund.

Argentina is in talks to speed up disbursement of money from a record $50 billion credit line with the IMF.

India

The Indian rupee has been on a free fall since the beginning of this year, declining 12% to become the worst performing Asian currency. While macroeconomic fundamentals of the country can’t be blamed to a great extent for the woes of the rupee, it is a fact that a confluence of external factors has hammered the currency.

Indonesia

Indonesia is the largest economy in Southeast Asia and has approximately 40% of its debt denominated in foreign currencies. Last week the rupiah, Indonesia’s currency, fell to its weakest level since the 1998 Asian financial crisis, having lost 10.5% against the dollar since the start of this year.

Indonesia’s central bank has hiked interest rates four times since May and intervened heavily in a bid to shore up the rupiah.

Brazil

Brazil, headed for its presidential election next month, is facing a huge currency crisis as the real plunged close to 30% this year as the Latin American economy continues to reel from its worst-ever recession.

South Africa

The rand, down 24% a year to date, fell sharply last week as newly released data showed that South Africa’s economy fell into recession last quarter for the first time since 2009.

Russia

The Russian ruble continues to decline, as the dollar continued to gain substantial ground against the emerging market basket of currencies.

Geopolitical pressure related to the resumption of discussion of the bill on new US sanctions against Russia may give bearish sentiment for the currency this week, together with possible oil price correction. The ruble’s year-to-date loss against the greenback is more than 17%.