The Turkish lira has recently been leading other emerging markets in a currency crisis that has spiraling downwards towards a debt crisis. As the dollar continues to strengthen, many other emerging markets are experiencing significant trouble propping up the value of their currency against the international standard. Analysts say those countries most exposed to this risk include Turkey, Argentina, India, Pakistan, South Africa and Colombia, all of which are finding it hard to pay back their dollar-denominated debts.
The collapse of the Turkish lira grabbed international headlines, not only for the political turmoil in its background, but also because it sent shock waves through Asia, and for good reason - as many emerging markets in Asia are expected to follow the same route.
Earlier this week the Indian rupee hit an all-time low against the dollar, as it reached evaluation of Rs72.45 to the dollar. Neighboring Indonesia had the value of its rupiah plummet to 14,829 against the dollar, its lowest level since 1998, and almost a 9% drop since the beginning of the year. This devastating pull backwards prompted President Joko Widodo to hold a cabinet meeting to discuss strategies to defend their currency against further falls.
Unfortunately, the same repercussions were felt by susceptible markets across the globe; in South Africa the rand took a nosedive; Argentina had its rates raised by 5% in August, in an attempt by its central bank to arrest the peso’s decline; while so far this year Turkey’s lira lost over 40% of its value against the dollar, prompting Erdogan to establish a committee that will take action against the nation’s “economic terrorists”. As of now, speculations of an upcoming interest rate hike by the Central Bank of Turkey, have somewhat curbed the downfall.
According to Bloomberg’s Emerging Market (EM) currency basket, these currencies are currently at their lowest nominal value of the last three years. This even goes beyond the level reached in 2016, when the commodity prices fell, resulting in an increase in the US dollar.
The underlying concern, initially flagged by the Turkish lira, is that all of these EM currencies will spiral into a debt crisis. Back when interest rates were low, many of these emerging markets gauged themselves on dollar-denominated debts. Yet all it took to reverse this trend was a powering US dollar that toppled a few local currencies. This made US debt far more expensive to maintain, and in a domino effect, floored most other EMs.
According to Chief Market Strategist at Capital.com, David Jones, the response of investors has been cautious. “...the memories of the far reaching effects of the Greek crisis have not been forgotten.Do not be surprised if we see cautious trading and further US dollar strength… as investors decide that it is better to be safe and late to any recovery, rather than too early and all too wrong”.
However, LaleAkoner, a market strategist in BNY Mellon's global investment strategy group, advised that this “risk-off” sentiment regarding EMs is not necessarily indicative of a belief that they share similar characteristics with Turkey. Rather, they are perceived as markets with pre-existing weaknesses that are plagued with country specific problems. Yet undoubtedly, the distinct risks for Turkey certainly feed into negative sentiment towards EMs in general.
Between those who think EMs assets are still a worthwhile investment, and those who deride it as an overhyped trend, the future of most currencies outside the majors remains uncertain as ever.