Free fall of emerging market currencies – by Matein Khalid


Emerging market currencies, now trading at their weakest level since the Bernanke Fed’s “taper tantrum” in May 2013, face multiple risks in the last quarter of 2015. Federal Reserve rate hikes, contagion from China’s financial market turmoil/yuan devaluation, collapse in oil prices (West Texas crude prices have fallen by a shocking 25 per cent since June) and commodities, weak banking systems, stagflation in Brazil and Russia, new political risks in Turkey and the Arab world, terrorist insurgencies in East and West Africa make 2015 the toughest macro environment for emerging markets since the Asian flu and Russian default in 1998.

Indian GDP can well rise above 7 per cent as the fall in oil prices is a $50bn windfall for Asia’s third largest economy. The pro-business, reformist agenda of the central government has also attracted global investors to the Indian debt and equity markets. This had led to a relatively stable 60 – 65 range for the Indian rupee, which has also been boosted by the narrowing of the current account deficit, Dalal Street “animal spirits” and international investor confidence in Dr Raghuram Rajan, governor of the Reserve Bank of India (RBI). While a mediocre monsoon will keep inflation above 5.5 per cent and prevent multiple RBI repo rate cuts this autumn, the Indian rupee remains among the best performing emerging markets currencies on the planet. Even so, the Indian rupee can well depreciate to 67 against the US dollar by year end 2015.

Pakistan has also benefited from the fall in oil prices, a new $6.7 IMF structural adjustment loan, the Chinese Politburo’s commitment to invest $46bn in an economic corridor and $3bn in sovereign Eurobond/issuance despite a non-investment grade credit rating. The Pakistani rupee was one of the few emerging market currencies that actually rose against the US dollar in 2014, boosted by a fall in the fiscal deficit, inflation rate and long term bond rates. This resilience will not last when the Yellen Fed raises interest rates and the Pakistani rupee falls to 108.

Southeast Asia’s currencies have been devastated by kKing dollar, the exodus of offshore capital, slump in exports to China and declines in economic growth. Malaysia is Southeast Asia’s only large crude oil and LNG exporter. So the crash in oil and gas coincided with Malaysia’s worst domestic political scandal since the Asian currency meltdown during Dr Mahathir’s rule in 1998. The fall in commodity prices, the 1MDB sovereign wealth scandal and the sacking of deputy prime ministerMuhyiddin Yassin has led to a fall in the Malaysian ringgit to 4.02 against the US dollar, a shocking 17 year low.

The fall in Bank Negara’s hard currency reserves demonstrates the fall in the Malaysian ringgit took place despite unsuccessful central bank intervention to support it. The Thai baht has also fallen to 35 as General Prayuth’s military regime has again postponed elections, mediocre industrial production, falls in exports and consumer confidence. Bangkok is Asia’s Detroit and suffers from a fall in Chinese auto sales. Offshore fund managers have slashed exposure to Thai equities. Bangkok is no longer the capital of Planet Forex’s “Kingdom of Smiles”. The Thai baht can well depreciate to 36.

Even the Singapore dollar, once hailed as Southeast Asia’s hard money “Swiss franc”, has fallen significantly against the US dollar since 2012, as exports to China fall, an overheated property market declines and the Monetary Authority of Singapore (MAS) is forced to ease monetary policy. I can easily envisage the Singapore dollar at 1.45 by year end 2015. The financial world’s euphoria with Prime Minister Joko Widodo has long failed and the rupiah has become one of the weakest currencies in Asia, now trading at “Asian flu”/Suharto era levels of 1998. The Southeast Asian economic and credit bubble has finally begun to deflate. The Indonesian rupiah can depreciate to 14500 by year end 2015.

The South Korean won has fallen 12 per cent in 2015 against the US dollar. Abenomics and the yen collapse has hit the competitiveness of South Korean conglomerates (chaebols) in global export markets. The MERS epidemic and China’s stock market collapse are disastrous for consumer confidence at a time when South Korean households are highly leveraged and industrial production is falling. The South Korean central bank will be forced to depreciate the won as offshore capital flees Seoul, possibly to as low as 1280 in the next twelve months.

The collapse in oil prices, anti-Kremlin sanctions over Crimea/Ukraine capital flight and double digit inflation is also a disaster for the Russian rouble, which has now fallen to 70 against the US dollar. The Russian rouble could depreciate to 72-74 as oil and metal prices continue to fall even as Western sanctions accelerate recession risk. However, the rouble is now the most undervalued major currency in the world.

Turkish airstrikes against ISIS in Syria and the PKK camps in the Qandil Mountains in northwest Iraq mean a higher risk premium on Turkish financial assets. The $50bn current account deficit, 8 per cent inflation rate, mediocre GDP growth despite lower oil prices, HSBC and Citigroup’s exit from the Turkish banking market and massive offshore selling on the Istanbul Stock Exchange and President Erdogan’s failure to forge a “grand coalition” after the June elections all explain the plunge in the Turkish Lira to historic lows. Even though the Turkish Lira has fallen 36 per cent since 2013, it can well fall to 3 against the dollar on the snap election news.

The South African Rand is also another currency under siege. The twilight of the Zuma era will lead to vicious intra ANC conflict at a time when the current account deficit is 6 per cent of GDP due to the world commodities bust. The South African Rand can fall to 14 against the US dollar once the Yellen Fed embraces tighter money.

China’s shock devaluation will not be limited to 2 per cent. The PBOC’s reassurances do not mean much as exports slump and $3 trillion in stock market losses hits China’s consumers, a mere 30 per cent of GDP. The Politburo wants a lower yuan, possibly to as low as 6.70.

(The author is a renowned investment banker based in Dubai)

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