Emerging Markets

Latin America after the super election year

Latin America was also affected by the trend where international investors often hold their breath at elections alongside the voting population. Against this background, the past twelve months in the region have been extremely exciting, with important elections being held in four countries in an environment of falling approval ratings for a working democracy. Centre-right governments (at least) were elected in Chile and Colombia, which represents a pragmatic approach as far as economic policy is concerned. The electorate in Mexico and Brazil, however, continued to “venture towards the fringes”. While a candidate to the left of the political spectrum – Andres López Manuel Obrador (AMLO) – emerged as the winner in Mexico, the right-wing Jair Bolsonaro was victorious in Brazil. This means we now have some clarity at least as to who holds the fate of the respective countries in their hands. However, one can only speculate right now about…

South African and Turkish investments are risky but attractive

The wind has shifted. While international investors still avoided financial markets in emerging markets this summer and scaled back significant investments, emerging market currencies have been able to stage a noticeable recovery in recent weeks. The South African rand and the Turkish lira have gained a good 4% and almost 19% respectively over the euro since the start of September. Turkey along with Argentina were at the heart of the emerging market turbulence during the summer months. Growing doubts about the central bank’s independence and concerns about further sanctions being imposed by the US, which would restrict the country’s access to international capital markets, generated considerable uncertainty among investors. Financial markets increasingly factored in a scenario whereby the situation could escalate, bringing about insolvency of many Turkish companies or even of the Turkish state. The portents of these two central factors driving the crisis have meanwhile turned. The Turkish central…

Turkish central bank takes a step in the right direction

The Turkish central bank has taken a step in the right direction with its latest decision: it raised the key rate by 6.25 percentage points to 24.00%. This is not only significantly more than market players had expected ahead of the central bank meeting. The key rate level is also – at least at the moment – well above the prevailing inflation rate. So a central demand on the central from international observers, namely that it must send a clearly restrictive signal to the Turkish economy, has been implemented. Probably even more important is that the monetary watchdogs’ decision today has placed them clearly at odds with the calls coming from the president. This morning Erdogan demanded that the central bank “lower these high interest rates.” This has given an unusual lift to hopes that the central bank on the Bosporus could after all be more independent than it seemed…

If the 2014 Rouble crisis were a blueprint for the Lira …

There are a few striking parallels between the crisis in the Russian currency witnessed at the end of 2014, and the turbulences in the Lira prevailing at present. They start with the exchange-rate trend to date. Compared to the beginning of the year, the Lira had lost up to around 45% against the US Dollar, while in the case of the Rouble, calculated for the period in question the decline was only 3 percentage points higher. Moreover, following the rapid devaluation in the Russian currency over the course of about three weeks, a temporary moderate recovery likewise set in, only to then give way to another pronounced drop. There are also similarities between the two currency crises as regards the causes. The basis for the Rouble devaluation was laid in 2014 by the clear decrease in the price of crude oil. However, the actual escalation in capital fleeing the country…

External exposure of the emerging markets

For some time now, the world of finance has been watching the emerging markets with bated breath, partly owing to the new US trading strategies. In this context, the crisis in Turkey has shown quite baldly how fatal a situation can arise if a critical (economic) policy combines with weaknesses in the external balance of trade. Problematic structures in relation to external balance sheets can send a tense situation into turmoil as key cushions to absorb the shock of the crisis are then lacking. A country with appreciably poor key financial ratios has little scope to err as regards macroeconomic management or political escalation. One can debate how such weaknesses can best be identified, and the list of possible indicators is no doubt long. However, a glance at the classic key external financial ratios – the current account balance, the scale and structure of external liabilities, and the strength of…

Little risk of a global emerging markets crisis

After a brief recovery, the pressure on the Turkish currency and government bonds has increased again. A series of rating downgrades served to put additional strain on a situation that was already far from good. As a result, the question of whether the Turkey crisis could become contagious and spread to other emerging markets is back firmly in the limelight. In terms of the real economy and the financial world, the escalation of the crisis should not result in appreciable risks of contagion. Turkey is not a very substantive trading partner for the relevant emerging market players. Russia, Bulgaria or Romania are all of a certain significance as regards foreign trade and a sharp drop in Turkey’s GDP would probably strain growth there, but would not result in a manifest crisis. Moreover, it would seem, or so BIS data shows, that the credit relations are more with banks in the…