No end in sight for currencies sell-off
Pressure on units in emerging markets will continue, top banks say, citing low rates
Inflation-adjusted interest rates are still too low in developing nations for Citigroup and Goldman Sachs to foresee an end to the worst emerging market (EM) currency sell-off in five years.
One-year borrowing costs in Turkey are 3.6 per cent, less than half of the average in the three years before the 2008 global financial crisis, even after the central bank doubled its benchmark rate last week. The real rate for Mexico is almost zero, while South Africa's is 1.4 per cent, compared with the average 2 per cent over the past decade.
Central bank rate increases in Turkey, India and South Africa last week failed to contain last month's 3 per cent sell-off in emerging-market currencies. Citigroup says yields are not high enough to attract capital needed to finance current-account deficits in some of those nations. Competition for capital is intensifying with the US Federal Reserve paring monetary stimulus while the International Monetary Fund is calling for "urgent policy action".
"When you have low real rates and try to finance your current-account deficits, it usually won't work," said Dirk Willer, a Latin America strategist at Citigroup. "If the US is repricing for higher rates, it's very difficult for you to get away with lower rates. South Africa and Turkey are not safe yet."
Global funds pulled out US$6.3 billion from emerging market stocks in the week to last Wednesday, the biggest outflow since August 2011, according to Barclays. More than US$12 billion have fled the funds this year, already approaching the full-year outflow of US$15 billion last year.
One-year real rates in emerging markets, based on the difference between interest-rate swaps and consumer price increases, are about 1 per cent, according to Goldman Sachs. While rising, the rates are lower than the average of about 2 per cent between 2004 and last year.
Turkey's central bank raised the benchmark one-week repo rate to 10 per cent from 4.5 per cent at an emergency meeting last Tuesday, a day after the lira fell to a record low of 2.39 to the US dollar. While the decision helped the lira rebound to 2.2565 per US dollar last week, it was still down 4.8 per cent last month.
South Africa's rand weakened to a five-year low of 11.3909 per US dollar on Thursday, even as the central bank unexpectedly raised interest rates by half a percentage point to 5.5 per cent. The currency declined 5.6 per cent last month to 11.1326 per US dollar. India's rupee fell 1.4 per cent last month as the central bank raised the repurchase rate to an 18-month high of 8 per cent.
"If policymakers don't respond appropriately to signals from the market, and very few in EM have done so convincingly so far, then asset prices continue to pressure the economy directly," Morgan Stanley economists Manoj Pradhan and Patryk Drozdzik said in a client report last week.
