Emerging markets under corona stress

The COVID-19 crisis is a major challenge for the emerging markets. The growth dynamics of the countries are visibly suffering and at the same time the risk appetite of investors is decreasing. Capital withdrawal and lower investments are the result. For the Turkish economy, the Corona pandemic is a special challenge, as it is still weakened by the consequences of the last currency crisis two years ago.

In Turkey, two important industries, the export industry and the tourism sector, have been hit hard. In contrast to the currency crisis two years ago, they are now completely absent as a support. The Turkish economy is therefore likely to suffer greater damage in the current year than in the currency crisis of 2018 and the financial crisis of 2009. The Turkish economy is expected to shrink by 8% in 2020 compared with the previous year.

The development of the currencies reflects the growing concerns of investors. The Turkish lira, for example, has lost significant value. However, the Brazilian real and other EM currencies have also suffered significantly from the corona pandemic recently. In view of the distortions on the currency markets, the central banks of some emerging markets resorted to currency market interventions in order to support their own currencies, which caused currency reserves to shrink more or less significantly. Turkey again stood out as a negative example, with currency reserves falling rapidly since the beginning of the year.

Foreign exchange interventions can absorb external shocks in the short term, but are not a permanent solution. Foreign exchange reserves are finite and cannot guarantee a stable currency development. This is particularly true when political developments are not conducive to the country’s development and, if necessary, take on autocratic features, which often go hand in hand. A stable currency needs a stable economic and social perspective for the country and such a perspective is usually based on a reliable government that is anchored in the people.

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