Recession fears stalk emerging markets
October 18, 2018
Turkey, South Africa and Argentina are among the emerging economies most at risk of recession, chief economist for business information provider IHS Markit, Nariman Behravesh, told DW.
The countries, which have seen their currencies battered this year, have "twin deficits" and large amounts of dollar and euro-denominated debt.
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An economy suffers from twin deficits when it has a fiscal deficit — when a country's expenses exceed its revenues — and a current account deficit, which means the value of the goods and services a country imports is more than the value of the goods and services it exports.
"Unless they can get help from the IMF or some kind of debt relief, the most indebted countries have little choice but to raise interest rates and tighten fiscal policy," Behravesh said. "They can also impose capital controls, but this is usually only a short-term fix and tends to drive away foreign investors."
Behravesh added that these economies took on too much debt when interest rates were low and are now "living with the consequences of rising global interest rates."
The Turkish lira and Argentinian peso have depreciated by over 35 and 50 percent respectively against the US dollar in 2018. The South African rand has fallen more than 10 percent.
Currency woes to continue
The currencies of Turkey, Argentina and South Africa and a host of other emerging markets, including India, will continue to be under pressure, IHS Markit said, adding that the Ukrainian hryvnia will be the most vulnerable.
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Ukraine suffers from chronic current account and fiscal deficits, high external debt exposure and inflation, and meager foreign exchange reserves.
"Emerging markets will remain susceptible for a least another couple of years as interest rates in the US and Europe rise," Behravesh said. "We don't expect interest rates in the developed world to top out until 2020."
Emerging market currencies had depreciated on average by about 8 percent by the end of September 2018.
Oil concerns
Rising oil prices are further expected to hurt emerging market currencies, including the Indian rupee.
The rupee has depreciated more than 10 percent this year, mainly hurt by high oil prices. India imports more than 80 percent of its oil needs.
"Rising oil prices are a growing headache for oil-importing countries, whose current account deficits will deteriorate," Behravesh said. "IHS Markit predicts that oil prices will remain above $80 (€69) per barrel (Brent) for at least another year."
Oil prices, which have risen nearly 40 percent in the past year, were hovering around $80 per barrel on Thursday.
Reuters news agency reported last month that Indian refiners were considering cutting back their imports as oil traders forecast crude oil to rise to $100 a barrel by the end of the year.
No global financial crisis
The ongoing trade war between the US and China, which has seen the two countries slap tariffs and counter-tariffs on each other's goods, is also expected to weigh on the currencies of emerging economies.
"Trade disruptions will likely hurt Asia's economies the most, but a weaker Chinese currency could have a broader negative impact on all emerging market currencies," Behravesh said.
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But the IHS chief economist said the current turmoil was unlikely to turn into a crisis like the Asian financial crisis of the late 1990s mainly because of the foreign-exchange war chests most emerging markets have built since then and a different process they have adopted to determine foreign exchange rates.
"The emerging market countries ... have either a floating or managed-float exchange rate compared with the countries that operated under currency pegs in the Asian financial crisis," he said, referring to an exchange-rate system in which a country pegs its currency's value to that of another country's currency.