21 Aug 2013
Projected Fed fallout roils emerging markets, crisis brewing?
FXstreet.com (New York) - One of the most widespread and perhaps under the radar phenomenon this week has been the staunch decline across a trifecta of emerging market (EM) bonds, equities, and currencies.
Repeat of 1997/98 crisis?
In due course, many investors worry of a repeat of 1997/1998 crisis, which culminated in widespread upheaval across these markets, however this notion is premature at best, and resembles more a correction to the excessive build-up of exposure to some of the weaker EM countries.
Indeed, the debilitation of emerging market currencies are restoring countries back to levels of competitiveness undermined by the surge of resources and financial capital looking for yield during the Fed's earlier rounds of QE. The moves have clearly revealed the weakest EM links, i.e. India, Turkey and Indonesia – all countries facing a combination of falling currencies, higher inflation and wider c/a deficits.
Contagion could snowball, investor diligence at a premium
With mere weeks to go before the September FOMC, and investor capital flight already in full force, FX reserve levels will certainly need to be closely watched to see how long they can hold out for, with key emphasis on supports and signs of bottoming out. However, the longer and more widespread this situation becomes, the more that market participants will worry of a more broad contagion, and to which extent other countries and currencies succumb to the outflows.
One notable currency that has been under siege lately is the Indian rupee, which fell to a record low vs. the USD. Recently, Indonesian markets tumbled and Turkey raised a key interest rate to halt a slide in its currency as turmoil in emerging markets deepened on Tuesday in anticipation of reduced U.S. monetary stimulus.
Global investors had flocked to developing economies in search of higher returns while interest rates in most advanced countries were already near zero. Some of this “scared” money is taking flight now that U.S. interest rates are rising in advance of a scaling back by the Federal Reserve of the huge bond purchases it has been making to spur the U.S. economy. The Fed's 'tapering" could begin as early as next month.
Without a doubt, emerging markets with shaky economic fundamentals that are dependent on foreign capital have borne the worst of the panic-induced sell-off. In Indonesia, the rupiah fell -2.0% to 10,700 vs. the USD, its lowest level since April 30, 2009, while the Jakarta benchmark share index - which at one point plunged -5.8% - shed -3.2% for the day.
Southeast Asia's largest economy spooked markets on Friday by reporting a wider-than-expected deficit on its current account deficit, the broadest measure of trade and payments. Josua Pardede, an economist at Bank International Indonesia in Jakarta, said Bank Indonesia (BI), the central bank, might have to raise the rate on its overnight deposit facility, or FASBI. "The fastest solution to calm the market is the FASBI," Pardede said.
Historic lows a prelude of things to come?
In India, Asia's third-largest economy, the rupee plumbed a record low beyond 64 per dollar before the central bank stepped in as a seller of dollars in both the spot and forward markets. India needs foreign capital to plug its perennial current account deficit. However, investors have been pulling money out of the country, not putting it in, unsettled by faltering growth and the failure of policy makers to tackle the economy's many underlying problems.
Repeat of 1997/98 crisis?
In due course, many investors worry of a repeat of 1997/1998 crisis, which culminated in widespread upheaval across these markets, however this notion is premature at best, and resembles more a correction to the excessive build-up of exposure to some of the weaker EM countries.
Indeed, the debilitation of emerging market currencies are restoring countries back to levels of competitiveness undermined by the surge of resources and financial capital looking for yield during the Fed's earlier rounds of QE. The moves have clearly revealed the weakest EM links, i.e. India, Turkey and Indonesia – all countries facing a combination of falling currencies, higher inflation and wider c/a deficits.
Contagion could snowball, investor diligence at a premium
With mere weeks to go before the September FOMC, and investor capital flight already in full force, FX reserve levels will certainly need to be closely watched to see how long they can hold out for, with key emphasis on supports and signs of bottoming out. However, the longer and more widespread this situation becomes, the more that market participants will worry of a more broad contagion, and to which extent other countries and currencies succumb to the outflows.
One notable currency that has been under siege lately is the Indian rupee, which fell to a record low vs. the USD. Recently, Indonesian markets tumbled and Turkey raised a key interest rate to halt a slide in its currency as turmoil in emerging markets deepened on Tuesday in anticipation of reduced U.S. monetary stimulus.
Global investors had flocked to developing economies in search of higher returns while interest rates in most advanced countries were already near zero. Some of this “scared” money is taking flight now that U.S. interest rates are rising in advance of a scaling back by the Federal Reserve of the huge bond purchases it has been making to spur the U.S. economy. The Fed's 'tapering" could begin as early as next month.
Without a doubt, emerging markets with shaky economic fundamentals that are dependent on foreign capital have borne the worst of the panic-induced sell-off. In Indonesia, the rupiah fell -2.0% to 10,700 vs. the USD, its lowest level since April 30, 2009, while the Jakarta benchmark share index - which at one point plunged -5.8% - shed -3.2% for the day.
Southeast Asia's largest economy spooked markets on Friday by reporting a wider-than-expected deficit on its current account deficit, the broadest measure of trade and payments. Josua Pardede, an economist at Bank International Indonesia in Jakarta, said Bank Indonesia (BI), the central bank, might have to raise the rate on its overnight deposit facility, or FASBI. "The fastest solution to calm the market is the FASBI," Pardede said.
Historic lows a prelude of things to come?
In India, Asia's third-largest economy, the rupee plumbed a record low beyond 64 per dollar before the central bank stepped in as a seller of dollars in both the spot and forward markets. India needs foreign capital to plug its perennial current account deficit. However, investors have been pulling money out of the country, not putting it in, unsettled by faltering growth and the failure of policy makers to tackle the economy's many underlying problems.