The damage spans the globe.
Thailand’s baht. Kazakhstan’s tenge. South Africa’s rand. Peru’s nuevo sol.
In emerging markets worldwide, currencies are plunging over fears that developing economies are on the verge of a crippling fall.
Photo: AFP
Success stories until recently, emerging economies are seen as casualties now — of slower growth in China, plunging prices for commodities like oil and iron ore, the prospect of higher US interest rates and homegrown threats.
The damage has spilled across oceans, with the turmoil jolting investors in New York, Tokyo and Europe.
Investors there worry that China and other major emerging economies will reduce their imports. They also fear a trade-disrupting currency war as some countries desperately lower their currencies’ value to gain a competitive edge.
A lower-priced currency makes a country’s goods cheaper for foreigners.
The Dow Jones industrials plunged 530 points, more than 3 percent, on Friday on top of a 358-point drop on Thursday. Tokyo’s Nikkei index shed 3 percent on Friday.
“It’s remarkable just how things turned around so quickly,” Capital Economics economist and former British Treasury official Neil Shearing said.
Consider Peru. Three years ago, its capital, Lima, was chosen to host an IMF meeting of global finance officials in what was seen as a celebration of Latin America’s arrival in the economic big leagues.
However, with the event six weeks away, Latin America’s outlook has descended from boom to gloom. Peru’s economy has steadily slowed, and its currency, the nuevo sol, has plunged 2.5 percent against the US dollar in the past month.
And Peru boasts one of the region’s healthiest economies. Brazil’s economy is expected to shrink this year and next. Its currency, the real, is down 7 percent the past month and more than 30 percent the past two years. The Mexican peso on Friday closed at a record low against the US dollar.
It is hardly just Latin America. Kazakhstan’s currency plummeted this week after the government decided to let it trade freely. The South African rand fell this week to a 14-year-low against the US dollar. Turkey’s lira hit a record low against the greenback this week.
Institute of International Finance executive managing director Hung Tran expects developing countries to post 3.8 percent economic growth this year, down from 4.3 percent last year. The institute is on the verge of cutting that forecast further.
Analysts point to a primary culprit:
“It’s all coming from China,” Tokyo-based JPMorgan Chase & Co economist Masamichi Adachi said. “Brazil, South Africa, many countries are commodity exporters, and the final destination is all going to China.”
China’s economy is expected to grow 7 percent this year, which would be its slowest pace since 1990.
Beijing is trying to manage a transition from rapid growth based on exports and often-wasteful spending on factories, real estate and infrastructure to slower, steadier expansion based on consumer spending.
That transition means China would need fewer raw materials — Chilean copper, Nigerian oil, Brazilian iron ore. That helps explain why China’s pullback has loosed carnage in global commodity prices: The Standard & Poor’s GSCI commodity index, which tracks 24 commodities prices, is down nearly 20 percent this year.
Emerging markets were already feeling the squeeze last week, when China devalued its currency, the yuan. That step ignited a semi-panic.
Most countries cannot blame China and the vagaries of the global commodities market for all their problems.
South Africa is battling labor strife. Brazil is contending with a corruption scandal at state-owned oil giant Petrobras. Turkey is struggling to form a government while its military battles the Islamic State extremist group and Kurdish separatists.
Adding to the pressure: The US Federal Reserve is expected, perhaps at its meeting next month, to raise the short-term rate it controls from near zero. Investors could respond by moving even more money out of emerging markets to seek higher US rates. That would lift the US dollar higher and emerging market currencies even lower.
A Fed rate hike could also squeeze emerging-market companies that have borrowed in US dollars. Those companies would struggle to accumulate enough local currency to pay their now-more-expensive US dollar-denominated debt.
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