Most economies, but particularly developing markets, were unnerved by signals from the FED early in May that it plans to reduce its monthly bond purchases. Fed Chairman Ben Bernanke’s announcement of an exit path out of its monetary policy in June caused quite a tremor in all markets at the time. US benchmark bond yields hit a two-year high near 3 percent on Aug.19 and the Turkish Lira tumbled, hitting a record low against the US dollar and fell to 1.99, with the interest rates for the first time in 2013 witnessing a double-digit number. The Turkish currency has weakened 12 percent against the dollar since early May, making it one of the most depreciated currencies during this time. Also in this period, the stock exchange fell by more than 20 percent. Other currencies from Brazil, India, South Africa, Malaysia and Indonesia also tumbled, registering losses between nine to 22 percent as well as falls in these markets’ stock exchanges.
$1.3 trillion out of emerging markets
The total amount of money that has flown out of emerging markets since May reached $1.3 trillion as of late August. The Fed’s decision in September will be the determining factor for these markets’ ultimate reaction. Global investors are dreading a decision of tapering bond purchases at Fed’s meeting next month. The potential Fed decision has created a sales pressure in all emerging markets. Turkey is one of the worst affected countries due to its sky high current account deficit and higher inflation rate as well as its dependence on foreign financing. Recent developments in the Syrian conflict are also affecting the markets.
1997 Asian crisis come-back?
Analysts are worried that a crisis similar to that of 1997 might be in store, particularly because developing economies in Asia have been having major troubles. It won’t be wrong at all to suggest that India is the nation that has triggered these concerns. Over the past 1.5 years, India has performed poorly across the board on almost all economic indicators. The country posted an 8.5 percent growth rate between 2006 and 2012 but it could grow by only 5.1 percent last year. The country’s performance this year shows that growth will be less than 5 percent. In addition to the slow-down in growth, India has a budget gap equal to 5.8 percent of its economy and a current account deficit equal to 5.4 percent of the economy.
As such, it needs foreign financing of 250 billion dollars annually. Attracting investors was relatively easy when liquidity around the globe was available and the country’s growth rate came close to double-digit figures. But when liquidity is taken out of the ocean, as Warren Buffet famously said, you see who has been swimming without a bathing suit, like India, and it is hard to convince investors to invest in those circumstances. Indian authorities have been taking measures to be able to draw international investors to a country struggling with a double deficit, structural problems and slowing growth.
A paradigm shift has occurred in perceptions regarding Asia, mainly owing to the situation of India. The Japanese economy has been growing steadily mostly owing to the country’s devaluation of its own currency radically. China has slowed down on imports from other Asian countries. And India is on the brink of a crisis. In other words the three largest economies of the region are undergoing transitions likely to cause trouble in other regions. But most experts say that, in spite of all the concerns, the likelihood of the troubles turning into an all-out regional economic crisis like in 1997 is low. The reason for this, analysts note, is that growth remains stable and strong despite slowing down, the foreign currency regime in these countries, the reasonable levels of foreign debt of these countries.
