LONDON (Reuters) – Emerging economies dependent on overseas financing to balance their books look vulnerable to another looming slowdown in bricks-and-mortar investment, as rising deficits in many countries force reliance on volatile financial market flows.
A report last month report by the United Nations agency UNCTAD painted a bleak picture of the outlook for foreign direct investment (FDI), noting a sharp slowdown globally in the third quarter of 2011 after a strong start to the year.
Turkey’s inflation spike is here. And it is looking worse than expected.
Data today shows October inflation jumping 3.27 percent, well above forecast and the highest in nine years. Compare that to 1.8 percent at this time last year. Annual inflation is now running at 7.7 percent and makes the central bank’s end-year forecast of 8.3 percent look optimistic –most analysts reckon it will be closer to 10 percent. Inflation has in fact been rising steadily in recent months — a consequence of the runaway credit boom of the past year and a policy experiment which saw the central bank cutting interest rates in the face of an overheating economy and raising banks’ reserve ratios instead. Add in the pass-through from the lira’s big depreciation since August and a jump in inflation is hardly surprising. The central bank has of late expressed some concern about inflation and used this to justify its actions to prop up the lira.
“Critics though might still argue that it is more a case of ‘as you sow, so you will reap’ and inflation being felt now is a reflection of the inappropriate policy mix earlier in the year,” RBS analyst Tim Ash writes.
Recent weeks have witnessed an interesting split between countries that are raising interest rates to fend off runs on their currencies, and those cutting rates to spur on growth — check out my colleague Carolyn Cohn’s recent piece on this topic (http://tinyurl.com/4x58ny6) .The frontier economies of Africa fall into the first category — Kenya this week jacked up rates by an unprecedented 550 basis points to ward off a currency collapse, while Uganda’s benchmark rate was increased by 300 bps.
Big stable economies such as Australia, Brazil and Indonesia have cut interest rates. On Wednesday, Romania became the latest country to do so. But an exception is investment grade Hungary, which may soon join the ranks of frontier markets in currency-defensive rate hikes.
Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan’s massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies. The action is unlikely to sit well with other central banks struggling to boost economic growth and raises the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September’s selloff. The won for instance is up 6.9 percent in October against the dollar — its biggest monthly gain since April 2009. The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.
Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar, and most analysts reckon Japan’s latest intervention is by no means its last. That’s bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ’s next move. “Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions,” BNP Paribas analysts said.
In less than two months, Turkey will mark the first anniversary of the start of an unusual monetary policy experiment, and it may well do so by calling it off. The experiment hinged on cutting interest rates while raising banks’ reserve ratio requirements, and as recently as August, the central bank was hoping it would be able to slow a local credit boom a bit but still protect exports by keeping the currency cheap. Instead, an investor exodus from emerging markets has put the lira to the sword, fuelling at one point a 20 percent collapse in its value against the dollar. That has forced the central bank to roll back some of the reserve ratio hikes and last week it jacked up overnight lending rates in an attempt to boost the currency. It has also sold vast quantities of dollars and is promising to unveil more measures on Wednesday.
But what the market really wants to see is an increase in Turkey’s main interest rate. ”Not sure that ‘measures’ short of rate hikes will help,” RBS analyst Tim Ash writes.
ISTANBUL, Oct 13 (Reuters) – Turkey, yet to complete its
2011 external financing plan, may be gearing up to sell debt as
the global markets gloom lifts, and robust performance by its
existing bonds during the recent turmoil indicates a new issue
would be well received.
International bond markets have been in lockdown for months
amid fears of a Greek default, a European bank meltdown and a
global recession. That means many expected bond issues from
emerging issuers, both sovereign and corporate, have not
materialised, leaving investors with cash in hand.
ISTANBUL (Reuters) – It’s 10 p.m. on a weekday evening and Istanbul’s cosmopolitan shopping street, Istiklal, is buzzing with youngsters checking out the latest fashions and phone models. In the noisy bars that dot the district, Turkish beer flows freely.
The contrast couldn’t be starker with the slumbering commuter suburb of Beylikdüzü, an hour from the city center. But
ISTANBUL (Reuters) – Turkey has upped the ante in defence of the lira, but with hard cash reserves far smaller than those of many developing economy peers, FX intervention may not be feasible for long should investors resume their exodus from emerging markets.
Faced with year-to-date lira losses of almost 20 percent to the dollar and rising inflation, the central bank this week mounted its most aggressive defence of the currency yet, selling a record $1.1 billion (715,000 pounds) on Wednesday and Thursday and making changes to banks’ reserve requirements.
LONDON (Reuters) – Emerging market central banks spending billions of dollars to defend their currencies risk depleting their reserves without much success as a deepening global financial crisis sends investors toward safe havens.
From the Korean won to the Turkish lira currencies are at multi-year, or even record, lows against the dollar, despite central bank action to stop them falling too sharply.
LONDON (Reuters) – A sell-off precipitated by global recession fears and the deepening euro zone debt crisis has resurrected the spectre of capital flight, a threat that still haunts emerging markets for all their vaunted strengths.
Three years after the collapse of Wall Street giant Lehman Bros sparked a stampede out of higher risk assets and sent emerging economies reliant on foreign funding into shock, such fears have resurfaced in recent days amid heavy emerging equity and bond losses accompanied by sharp currency weakness.