Emerging Market Tornado
Since August 29, the "Explosion 2.0" information from a series of emerging markets such as Turkey, Argentina, and Brazil has continuously bombarded the already fragile nerves of the market. The Turkish lira and the Argentine peso are competing to become the currencies with the most depreciation against the US dollar this year.
However, many market participants believe that the sharp depreciation of currencies in emerging market countries such as Turkey and Argentina is not enough to spread into the currency crisis of the entire emerging market. Emerging markets as a whole are more capable of coping with the appreciation of the dollar than in 1997 and 2013. The risk situation of different countries is not the same.
Turkish and Argentine currencies stop falling and stabilize
The current round of Turkish lira that started before the festival in Gurbang continues to enter the 2.0 era after the festival. Since the beginning of this year, the lira has depreciated about 38% against the US dollar. After the market was closed for the Gurban holiday, the lira fell to the lowest level of 6.6227 against the US dollar in more than two weeks during the intraday trading on August 30. Subsequently, on August 31, after Turkey cut taxes on lira bank deposits, the lira rose by 1.15% to 6.5731.
At present, Turkey's trade deficit and foreign debt are both very large. In 2017, Turkey's trade deficit reached 76.8 billion U.S. dollars, and the trade deficit accounted for more than 9% of GDP. In the first quarter of 2018, Turkey's total foreign debt reached 466.7 billion US dollars, the ratio of foreign debt to GDP was as high as 55%, and the total foreign debt was 5.4 times of foreign exchange reserves. In addition, according to a report by the International Monetary Fund (IMF), more than 90% of Turkey’s foreign debt is denominated in foreign currencies.
The International Finance Association (IIF) stated in its recent global macro outlook that Turkey’s credit boom last year has been reversed, and the extension of external debt will also decline. The July data will be released in the next few weeks, from which we can see the ongoing credit crunch in Turkey. But the more forward-looking question is how much Turkey’s external balance has improved and what this means for the lira. The global macro outlook states: "Our model shows that the actual depreciation of the lira may even turn Turkey's current account (from a deficit) to a surplus in the next few years. Therefore, the fundamentals of the lira are at the expense of material output. , A rapid improvement occurred."
Also connected with Turkey is Argentina. The exchange rate of the Argentine currency, the peso to the US dollar, has been falling since late April 2018, and the depreciation of the peso has contributed to the soaring inflation rate. Argentina’s CPI in July rose 31.2% year-on-year. The Argentine central bank raised interest rates three times a week at most, which was even called a "desperate rate hike" by some analysts.
"Perfect Storm" is too early
According to statistics, since 2018, the local currencies of emerging market countries have generally depreciated against the US dollar. Among them, the Venezuelan bolivar, the Turkish lira and the Argentine peso have all depreciated by more than 50%, while the Brazilian real, the Russian ruble, and the South African rand have depreciated. And the Indian rupee has depreciated by more than 10% relative to the U.S. dollar.
However, many market participants believe that the currency depreciation of some fragile emerging market countries is not enough to spread and become a currency crisis of the entire emerging market.
In an interview, Khor Hoe Ee, chief economist of the ASEAN and China-Japan-Korea Macroeconomic Research Office (AMRO), expressed optimism about the overall situation of emerging market countries in East Asia.
"Continuous interest rate hikes in the United States will rebalance the investment portfolio, and the subsequent capital outflow will also put pressure on East Asian countries. We have now seen Argentina face troubles, as well as Turkey. Malaysia has been facing tremendous pressure recently. "But he said that the overall US dollar foreign exchange reserves in East Asia are huge and abundant, especially in China. Most countries in the region have enough buffers to withstand the pressure of short-term capital outflows of about one year. Some countries in East Asia will face some difficulties, but these difficulties are still manageable and controllable as a whole.
He also suggested that those countries in the region with less abundant foreign exchange reserves and less robust economies need to make their own interest rates more flexible in order to build more buffers.
In addition, Xu Heyi said that a mechanism similar to the Chiang Mai Initiative Multilateralization Agreement (CMIM) can provide East Asian countries with a second option for obtaining US dollar foreign exchange.
"CMIM is a huge arrangement with a scale of 240 billion U.S. dollars. Each country in the region has a quota. Large countries can borrow equivalent to 3 billion U.S. dollars in foreign exchange reserves. The amount of borrowing is very large. Even the IMF can only borrow. The same amount of foreign exchange reserves. When a country’s own foreign exchange reserves are insufficient, it can borrow from CMIM to deal with short-term foreign exchange liquidity shortages. At the same time, CMIM also includes arrangements for currency swap arrangements. Other member states in exchange for U.S. dollars.” He said, “At present, 30% of the borrowings can be directly through the CMIM mechanism, and 70% of the borrowings need to be withdrawn through IMF projects. We are currently working to make 70% of the IMF’s borrowing part also Can be easily used. As time changes, as the global economy grows or the country’s foreign exchange burden increases, we also need to reassess the scale of the CMIM mechanism."
Shen Minggao, director of the China Chief Economist Forum and chief economist of GF Securities, through the study of historical currency crises, the real exchange rate, foreign exchange reserves, GDP growth rate, current account, credit growth rate, inflation and fiscal surplus are 7 indicators. Position the main indicator for evaluating whether a country will have a currency crisis.
Based on this measurement, he believes that if the US dollar continues to strengthen, emerging market countries such as Egypt, South Africa, Iran, Colombia, and Nigeria are likely to have currency crises. Among them, Egypt and South Africa are most likely to have a crisis. But he also said that compared with before the Asian financial crisis in 1997, the overall situation of emerging market countries has improved. Unless some indicators deteriorate rapidly, the possibility of a crisis of similar scale is unlikely to occur. From the perspective of external debt solvency indicators, Turkey, Argentina, Malaysia, and South Africa’s short-term foreign debt/foreign exchange reserves all exceed 60% (the short-term foreign debt of Turkey and Argentina is already higher than foreign reserves), and Turkey is net external debt, so debt repayment Ability is relatively weak.
At the same time, from the perspective of the maturity distribution of US dollar debt, emerging markets will usher in a small peak of pressure on US dollar debt maturity in 2019. Except for China, Argentina, Turkey, and Brazil have higher dollar debts due in 2019. This means that in the context of rising US interest rates, they will face higher short-term debt repayment pressure. Although China's total foreign debt is relatively large, short-term foreign debt accounts for less than 40% of its foreign reserves. Therefore, in terms of foreign solvency, China does not need to worry too much.
In terms of inflationary pressures, the vicious circle of "domestic currency devaluation-inflation-forced interest rate hikes-downward fundamentals" is more obvious in Argentina, Turkey, and Russia. In China, Thailand, Mexico, the Czech Republic, Hungary, and Poland, the devaluation of the local currency does not necessarily lead to Inflation, so the central bank will not necessarily raise interest rates.