Sinking currencies point to market jitters

Washington,  August 22

The damage spans the globe.

Thailand’s baht. Kazakhstan’s tenge. South Africa’s rand. Peru’s nuevo sol.

In emerging markets worldwide, currencies are plunging over fears that developing economies are on the verge of a crippling fall. Success stories until recently, emerging economies are seen as casualties now — of slower growth in China, plunging prices for commodities like oil and iron ore, the prospect of higher US interest rates and homegrown threats.

The damage has spilled across oceans, with the turmoil jolting investors in New York, Tokyo and Europe. Investors there worry that China and other major emerging economies will reduce their imports. They also fear a trade-disrupting currency war as some countries desperately lower their currencies’ value to gain a competitive edge.

A lower-priced currency makes a country’s goods cheaper for foreigners.The Dow Jones industrials plunged 530 points, more than three per cent, on Friday on top of a 358-point drop on Thursday. Tokyo’s Nikkei index shed three per cent on Friday.

For all the markets’ jitters, many economists say they remain confident that US economy is resilient enough to withstand a slowdown in developing world. And Europe’s economy appears to be emerging from its long slump. Even so, the trouble in emerging markets is a surprising and unsettling reversal.

“It’s remarkable just how things turned around so quickly,” says Neil Shearing, an economist at Capital Economics and a former British Treasury official.

Consider Peru. Three years ago, its capital, Lima, was chosen to host an International Monetary Fund’s meeting of global finance officials in what was seen as a celebration of Latin America’s arrival in the economic big leagues.

But with the event six weeks away, Latin America’s outlook has descended from boom to gloom. Peru’s economy has steadily slowed, and its currency, the nuevo sol, has plunged 2.5 per cent against US dollar in past month.

And Peru boasts one of the region’s healthiest economies. Brazil’s economy is expected to shrink this year and next. Its currency, the real, is down seven per cent the past month and more than 30 per cent the past two years. The Mexican peso closed on Friday at a record low against the dollar.

It’s hardly just Latin America. Kazakhstan’s currency plummeted this week after the government decided to let it trade freely. The South African rand fell this week to a 14-year-low against the US dollar. Turkey’s lira hit a record low against the dollar this week.

Hung Tran, an executive managing director at the Institute of International Finance, expects developing countries to post 3.8 per cent economic growth this year, down from 4.3 per cent in 2014. The institute is on the verge of cutting that forecast further.

Analysts point to a primary culprit: “It’s all coming from China,” says Masamichi Adachi, an economist with JP Morgan Chase in Tokyo. “Brazil, South Africa, many countries are commodity exporters, and the final destination is all going to China.”

The Chinese economy is slowing more sharply than most people had expected from the double-digit growth rates of the mid-2000s.