Why some emerging markets are crashing

Turkey has been at the centre of the rout, but many other countries including Argentina have been hit

Turkey has been at the centre of the rout, but many other countries, including Argentina, Hungary and Indonesia, have been hit as investors dump riskier stocks and bonds for the safety of US assets. For some economists, it raises the spectre of the late 1990s-era Asian economic crisis. What’s going on?

Why are emerging suffering?

The easy answer is that money is fickle and opportunistic — it goes where it can get the highest return, flowing out of countries as fast as it flows in. This latest upheaval started when the US, Japan and Europe kept interest rates close to, or below, zero to help their stagnant economies recover from the 2008 financial crisis. That made returns on stocks and bonds unattractive, and drove investors to developing nations, where the risks were higher but the payoffs more inviting. Emerging markets, as a result, have enjoyed a rally in stocks, bonds and currencies. But the reverse is now happening as investors react to several signals from the US — faster growth, rising interest rates and a stronger dollar. All three indicate potentially higher returns on US investments and thus act as a magnet for money. They also undermine the attraction of riskier emerging markets. The turmoil in Turkey has especially rattled investors.

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How scary can this get? Some say this is just a market hiccup as speculative investors betting on a weaker dollar were caught off guard by the US currency’s new strength. Others say the developing world is in worse shape than many investors think. Harvard professor Carmen Reinhart, for example, has said mounting debt loads, trade battles, rising interest

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markets rates and stalled growth have made emerging markets more vulnerable than on the eve of the 2008 financial crisis. Paul Krugman, the Nobel Prize-winning economist, has said the current episode somewhat resembles the Asian financial crisis of the late 1990s, when the MSCI Emerging Markets Index for developing-nation stocks slid as much as 59 per cent.

What caused the Asia crisis?

It started when a real-estate bubble burst in Thailand, which undermined confidence in the economy, causing foreign investors to sell the currency and withdraw from the stock market. The crisis spread to the banks, and then across much of East Asia. Many of the afflicted economies had strong growth records that masked weaknesses like non-performing bank loans, heavy foreign borrowing and rising trade deficits.

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Who

Economies dependent on dollars and other foreign currencies to finance their trade deficits — the Philippines, India and Indonesia stand out — have the worst-performing currencies in Asia this year. Those with the highest rates of foreign ownership of government bonds could be the most vulnerable to capital outflows, including South Africa, Indonesia and Russia. ■

Why is Turkey in so much trouble?

It’s been one of the hardesthit emerging-market currencies, shedding more than 17 per cent of its value against the dollar this year. Turkey has a large budget shortfall and one of the biggest trade deficits in the G-20 group of nations. And though Turkey’s inflation rate is more than 10 per cent, its central bank was prevented from raising interest rates by President Recep Tayyip Erdogan, who is seeking re-election in June and says he prefers low interest rates, based on his own ideas about monetary policy.

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