Officials from top emerging market economies, the star performers of recent years, were at pains to reassure the World Economic Forum of their countries’ stability amid turmoil in the currency markets.
With the Argentinean peso plunging 14 percent in two sessions of panic selling and the Turkish lira hitting all-time lows amid political chaos, the stability of emerging markets sparked concern among the movers and shakers at the Davos ski resort.
However, delegates were urged to look beyond the short-term volatility currently roiling the emerging markets and focus on the positive fundamentals.
Turkish Deputy Prime Minister Ali Babacan told the forum that despite the lira crashing through the key level of 2.3 to the US dollar, this was not due to investors taking fright and pulling out of the country.
Dismissing the recent volatility as “temporary” and “repricing,” he told a packed audience at Davos that “people who are actually investing in Turkey are keeping their money in Turkey.”
“People who have long-term confidence in the country are still there and they have a long-term view, which is important for us,” he added.
Nevertheless, he acknowledged that several Turkish companies were buying euros and dollars for fear of a further decline in the lira amid a corruption scandal that has sparked a deep political crisis.
“Especially the local political events, they think it is better to buy dollars or euros now rather than waiting,” Babacan said.
Renault-Nissan CEO Carlos Ghosn said investors like him also had to take the long-term view and ride out short-term volatility.
“You have to be ready, when you invest in emerging markets, for ups and downs,” he said. “What is important is not the next three months or the crisis of yesterday or the volatility of next week. We invest for the next 20 or 30 years.”
Another top banking official, who declined to be named, said that currency markets were “overreacting” and that the volatility would be “ephemeral.”
The emerging markets also shrugged off fears that their economies would suffer from the US Federal Reserve’s decision to “taper” its US$85-billion a month stimulus program. Last month, the world’s biggest central bank cut this program by US$10 billion, prompting worries that investors who had parked this excess liquidity in emerging markets for higher yields would pull it out.
However, Indian Minister of Finance P. Chidambaram, whose country was hit especially hard in May last year when the Fed warned it might begin the “taper,” said that his economy was well prepared in the event of further withdrawal of stimulus.
“Now I think we have done a lot of preparatory work. There will be some consequences in developing and emerging economies, but I think we are better prepared for the taper than when we were surprised in May,” Chidambaram said.
“Fiscal consolidation has taken place, there’s more FDI [foreign direct investment] flowing into India. We’ve added to our reserves, the rupee is stable and a number of other measures have been taken to bring stability into the capital market,” he added.
Meanwhile, the IMF managing director Christine Lagarde warned on Saturday of the risks posed to global economic recovery from the reduction of the Fed’s monetary stimulus and falling prices in the eurozone.
Despite growing evidence the global economy is faring better than it has for years, Lagarde said policymakers around the world have to be alert to the potential repercussions from the Fed’s “tapering,” a policy change it decided to embark upon last month. So far, the move has been minimal — it has reduced the amount of bonds it buys each month by US$10 billion to US$75 billion — but many economists think that it could end this year if the US economic recovery gains steam.
“This is a new risk on the horizon and really needs to be watched,” Lagarde said in a discussion about the global economic outlook at the World Economic Forum.
Lagarde also cautioned about the outlook for the 18-country eurozone. Though the eurozone has emerged from its longest-ever recession and many of the bailed-out countries appear headed for modest growth, inflation has fallen sharply. At last count, it was down at 0.8 percent in the year to last month, way below the European Central Bank’s target to keep price rises just below 2 percent.
Many economists have worried that the eurozone may be about to suffer a debilitating bout of deflation, which Japan has experienced for the best part of two decades. Falling prices can hurt an economy as consumers postpone spending in the hope of getting cheaper deals in the future, while businesses fail to innovate and invest.
Lagarde said the IMF thinks there is a 15 percent to 20 percent chance that the eurozone may suffer deflation.
“The risk is that longer term expectations are anchored at a much lower level than it is currently associated with,” Lagarde said.