Emerging markets’ volatility can be a big pain
Anthony Dass | 14 Sep 2018 00:30
In the past six months, some emerging market (EM) economies found themselves flat on the floor, struggling to breathe. For instance, the Turkish lira has been busy setting new all-time lows, driven by concerns of the country’s large current account deficit as well as a large stock of dollar denominated debt hurt by the US Federal Reserve’s decision to further raise its policy rates and a stronger dollar.
The problem in Turkey is further aggravated by its refusal to raise interest rates to stem the crisis as the president is of the view that high interest rates will fuel inflation. Markets reacted negatively to this.
Argentina’s problems are not getting any better, despite taking conventional measures to stem a currency crisis such as raising interest rates, selling reserves, and reducing government spending.
In June, the government even repaired ties with the International Monetary Fund (IMF) after a decade-long break. It sought support from the IMF to speed up the release of the US$50 bil (RM207.43 bil) in funds from its new agreement. This spooked the global market and saw the peso resume its plunge.
What began in Argentina and Turkey has raised the possibility of a potential snowball into broader collapse in confidence that has policymakers in Indonesia, India, South Africa and Brazil scurrying to protect their economies.
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