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Read More >Emerging markets have taken a beating: All you need to know
Publish Date: September 10, 2018
The term ‘Fragile Five’ has made a comeback. This is in reference to the developing economies of South Africa, Turkey, Indonesia, Brazil and India. While the term was consigned to the bin following its strong performances since the US tapering in 2013, the tag has reared its ugly head again.
Amplified global crude oil prices, skewed balance of payment due to currency depreciation, ongoing US-China trade war and China’s slow and structural growth have set the cat amongst the pigeons in the emerging markets.
Gloomy outlook
Experts feel that capital flight may intensify if the emerging markets remain in a funk. That looks likely because the turmoil in the emerging markets may be a prolonged affair because the US markets have started performing well and expected tax cuts will further boost the American industries.
Related read: Impact of trade wars on India
Strong capital flight is another indication of the gloomy market sentiment. By that rule of thumb, the slump may carry on for a few months as Foreign Institutional Investors (FIIs) outflow has accelerated in recent months. In fact, some of the emerging markets have seen an investment outflow of $3 billion and $9 billion.
Currency depreciation also has a correlation with the assets market. The consistent slide in currency against the US dollar hasn’t helped matters in this case. The US bond market has gone negative as well, suggesting that investors are regaining confidence in the US equity markets.
There are other factors too. Over-reliance on foreign investments for conducting trade and large-scale borrowing in dollars due to zero-interest rates right after the global financial meltdown have derailed their progress since 2016.
Related read: China’s contagion effect on world markets
Some analysts have been taken unawares by the sudden crises too. That’s because they ignored the widening trade deficits and increased government spending. They also did not believe that these economies would find it difficult to repay the debt even if the US dollar was on the rise.
Bearish mode
As a result, the emerging-market stocks entered a bearish market this week. The MSCI Emerging Market Index plunged by more than 20%, which is the limit of a bearish market.
The market has slumped close on the heels of global contagion concerns stemming from Turkey and Argentina. Analysts believe that this is just the start. Since the volatility in emerging markets refuse to cease, the market slide may continue for some time.
That’s why it will be better to look at each of the ‘Fragile Five’ economies individually to understand how global factors have upended investor confidence.
Turkey: Lira tangle
The country’s currency crisis has had a domino effect in the emerging markets. The currency slipped by more than 20% against the US dollar in the first half of August due to a tit-for-tat tariff tattle with the US.
On August 10, US President Donald Trump announced on Twitter that the US would double steel and aluminum tariffs on Turkey, which sparked a sharp decline in Lira value. In retaliation, Turkey imposed their own set of tariffs on US tobacco, cars and alcohol.
The other major factor behind the economic turmoil is Turkey’s high US dollar debt. A New York Times report suggests that Turkey’s foreign currency debt is higher than other emerging markets. This means that when foreign investors, who are mostly dollar-denominated, pulled their money out from the economy, Turkey’s GDP went into a tailspin.
Turkish President Recep Tayyip Erdogan’s refusal to raise interest rates have also played a part, despite inflation numbers reaching its highest since the 2001 crisis.
Bloomberg suggests that Turkey’s corporate sector has foreign currency debt in US dollars, which is about 40% of the country’s GDP. Repaying the debt amid a weakening Lira has further destabilized the economy.
A lot of countries like Turkey borrowed from in US dollars in large amounts because the US government was providing loans at nearly zero-interest rates post the global financial meltdown.
South Africa: Recession rears its head
The country’s currency, Rand, has depressed by 24% this year. The Rand shed further on Tuesday following news of the economy slipping into a recession for the first time since 2009.
The South African economy is actually in the midst of a technical recession, which means the country’s GDP shrank in two consecutive quarters. Squeeze in industrial and agriculture activity is the primary reason why the economy shrunk by 2.6% in the first quarter and 0.7% in the second quarter of 2018.
The currency crisis in Argentina has also taken a toll on the African nation’s economy, suggesting that countries that have leant heavily on foreign investment to spur its economy are at particular risk. This holds true as fears of contagion have sparked massive sell-offs in the two markets.
Brazil: Unpredictable elections
Brazil currency Real has plunged 20% since the start of 2018. The threat of further devaluation looms large as the country is gripped with political uncertainties.
Brazil is set to vote a new president this October but the outcome of the election remains hazy. While foreign investors want a pro-business leader to helm the country, recent polls suggest that the country is leaning towards leftists candidates such as Luiz Inacio Lula da Silva.
The trucker’s strike in May following current President Michel Temer’s decision to sell Petrobras at international rates also led to further volatility in the markets. Prices shot up by almost 50% in 2018.
The US government’s decision to shore up its economy has also impacted the Brazilian economy. The strengthening of the US dollar has meant that the Real has shrunk further.
Indonesia: Rupiah is the new pariah
The country’s dependence on foreign investment for trade has hit them hard. Its currency, rupiah, is hurtling towards the 1998 crisis levels as it nears 15,000 per US dollar.
The current turbulence in Turkey and Argentina has led investors to buy renewed US stocks instead.
India: Widening fiscal and current account deficits
High global crude oil prices and wearing rupee have had ripple effects on the local economy. With crude prices expected to remain between $80-90 per barrel, the country’s fiscal math has gone awry. While the annual fiscal deficit target of 3.3% is expected to be breached by the government due to escalating fuel subsidy costs, the current account deficit is also expected to be 2.8% of the country’s GDP.
Related read: What is driving the rupee up
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