- 2018-10-12
The global economy has a red light?
Once threatened to surpass the Chinese economy, now the Vietnamese dong is sluggish, and it is hard to justify it. In recent years, Vietnam's economy has developed rapidly and opening to the outside world has increased. In the first half of this year, its GDP growth rate reached 7.08%. Therefore, Vietnamese experts once said that Vietnam is expected to catch up with China's economy within 10 years. But as far as the current situation is concerned, I don't know whether this statement is a bit exaggerated.
Similarly, the Vietnamese dong, like the renminbi, has continued to weaken due to factors such as the strengthening of the U.S. dollar and market expectations. This year, Vietnam lowered its official exchange rate by 1.1%, causing the market exchange rate to fall by 2.7% in order to retain foreign-funded enterprises in Vietnam. In order to meet market demand and stimulate the Vietnamese dong, Vietnam sold 2 billion US dollars in just one week. If this rate continues, Vietnam may consume 12 billion US dollars of foreign exchange reserves accumulated through hard work last year.
Vietnam's reckless recovery of the Vietnamese Dong is mainly because the rapid growth in recent years has benefited from the inflow of foreign capital. Data in 2017 shows that Vietnam’s foreign investment accounts for about 190% of GDP. Under this circumstance, the market is extremely price-sensitive. If Vietnam’s value depreciates significantly, it will lead to a large loss of foreign investment. At that time, Vietnam will not only be unable to exceed that in 10 years. China may even fall back to the level it was 10 years ago due to its unbearable blow.
In addition, inflation and debt have also overwhelmed Vietnam. Inflation has exceeded the central bank's 4% standard for two consecutive months; public debt accounts for a large proportion of GDP, close to the danger line of 65%.
At present, the Central Bank of China has taken measures to stabilize its currency trend, but it is clear that Vietnam does not have this strength yet. The Vietnamese Dong may continue to be under pressure in the future.
The currencies of emerging countries such as Vietnam and Turkey have collapsed one after another. Could the US dollar cause another economic crisis? However, not only the currencies of China and Vietnam have fallen, but the currencies of emerging countries such as Turkey and India are also very depressed.
Since this month, the Turkish lira has depreciated by nearly 30%, triggering panic in the market. As we have warned many times since October 2017, the sharp depreciation of some emerging market currencies is a manifestation of the fragile fundamentals of their issuing countries. We believe that although last year’s diversification boom regained its momentum and emerging markets emerged in an all-round way, the superimposition of macro-uncertainties may still trigger the “old power is already weak, but the new power is not strong” during the recovery shift period and the reshaping period of globalization. Aftershocks of the crisis. On the whole, the devaluation of emerging market currencies that can be predicted has a degree of influence, but some banks with larger exposures will face "risk spillover": As the largest relative proportion and concentration of exposure, the Spanish banking system may be affected. The largest; Chile, which has relatively large exposures to countries that issue dangerous currencies in Latin America, and Portugal, which lacks robust banking systems, also face certain risks.
Since the beginning of this year, as the volatility of major assets has risen due to the risk of global economic shifts, emerging market currencies have depreciated significantly. The nominal effective exchange rate has reached a new low in 25 years, and the real effective exchange rate has also depreciated by more than 3% during the year (see attached picture for details) ). Affected by the divergence of economic growth expectations and drastic changes in risk appetite, some emerging markets are facing the impact of capital "fast in and out", and exchange rates have depreciated sharply. Since the beginning of the year, the Venezuelan bolivar, the Argentine peso, and the Turkish lira have depreciated by more than 30%, and the South African rand and Brazilian real have depreciated by more than 10%.
The sharp depreciation of emerging market currencies is a manifestation of the fragile fundamentals of some countries. Since 2018, global financial risks have re-concentrated, the Fed’s accelerated interest rate hikes and the decline in market risk appetite have driven the withdrawal of global liquidity from emerging markets. In fact, we have repeatedly warned dangerous currencies in our reports in October 2017, January 2018, and July 2018. Through comprehensive sovereign default risk, foreign exchange reserves, double deficit levels and other indicators, we have listed the top ten dangerous currencies in emerging markets in 2018, including the Venezuelan bolivar, the Argentine peso, the South African rand, the Turkish lira, the Brazilian real, and Mexico Peso, Indian Rupee, Vietnamese Dong, Indonesian Rupiah, Belarusian Ruble.
Since the beginning of this year, following the sharp depreciation of the bolivar, peso, rand, and real, the Turkish lira has depreciated by nearly 30% this month, triggering panic in the market. The depreciation of currencies in the aforementioned emerging markets is not an accident. The fragile fundamentals are the fundamental driving force behind the violent fluctuations in their currency values. Take Turkey as an example. Economic imbalances and monetary easing have been around for a long time, and the recent sharp depreciation is just the lead of the gunpowder barrel being ignited. Specifically: First, the economy’s endogenous momentum is relatively weak, and it is significantly dependent on external financing. Turkey’s external debt accounts for more than 50% of GDP; second, the central bank’s monetary policy is dovish in the early stage, and the current inflation level has exceeded 10%; third, domestic Banks have a high rate of bad debts and long-term current account deficits, and there are always concerns about defaults. With the return of the U.S. dollar back to strength this year, the decline in financial preferences, the accumulation of geo-risks, and the phased regression of globalization, the depreciation of the Turkish lira is reasonable.
At present, these emerging countries rely on foreign investment to develop their own economies. However, the United States has declared that it does not want the already strong economy to overheat. The Federal Reserve has announced interest rate hikes in June, and the market is therefore expected to raise interest rates twice this year. The return of the US dollar has caused these emerging countries to lose a large amount of funds, and the value of their currencies has also been greatly reduced. In August, the U.S. dollar has fallen below the mark of 7 against the Turkish lira, and the Argentine peso has plummeted by more than 60%. Other emerging countries such as Russia, India, and Brazil are no exception.
A stronger US dollar will not only cause capital outflows from emerging countries, but also set them back in purchasing strategic resources such as crude oil. Especially countries like Vietnam and India that are vigorously developing manufacturing industries can only sigh silently at the high oil prices in the face of their own currency trends. In this regard, some countries may have to be forced to raise the interest rates of their currencies in order to save the last bit of dignity of their currencies.
The strength of the US dollar has caused crises in various countries. The severity of the situation inevitably reminds us that every cycle of US dollar interest rate hikes in history is usually accompanied by the outbreak of economic crises. At present, the economies of all countries have turned on red lights. Will history be staged again?