Between The Lines

Aug 27 • Between the lines • 1813 Views • Comments Off on Between The Lines

Currency crises get ‘real’ for Brazil, India and other emerging economiesburned-money

When not discussing the ‘T’ word (tapering) the financial press has recently delivered many articles on the situation regarding India and in particular its collapsing currency the rupee, which is devastating the Indian economy. India’s financial woes are critical.

The rupee has depreciated by over 44% during the past two years and has reached record lows versus the US dollar over recent days. The India stock market is down, bond yields are now closing in on 10%, whilst capital flight is proving to be a major destabilizing factor. The reason for the rupee collapse appears straight forward; higher yielding currencies like the rupee grew due to searches for yield by global investors. If the asset purchase/monetary easing policy is tightened in the US, then the dollar becomes more attractive and the rupee falls.

India is grappling with a huge budget deficit, and the country only has foreign exchange reserves to pay for seven months of imports at the current level. Economic growth slowed to a very poor five percent last year, the lowest level seen in over a decade, whilst inflation is spiraling. To stem the decline in the rupee, the government raised its short-term interest rates, they also capped overseas investment by Indian companies and announced a weekly auction of government bonds, worth about $3.6 billion.

However, there’s another issue that many traders and analysts might be missing in relation to the collapse of the rupee and it may also be relevant for the recent collapse of other BRIC nations’ currencies such as the Brazilian real. The recent lack of commodity exports in these relatively new expanding economies, they’re far too reliant on consumers through imports to supercharge their rapid growth economies. That initial rocket boost of demand causing growth is now over and rebalancing the economies may be a far more difficult process than many economists are suggesting…

 

Brazil begins to get ‘real’ and fights back

The real has slumped over the past three months, by the most amongst the emerging-market dollar counter-parties, inflating the price of imports and threatening to further fuel inflation. The social economic results have been devastating; many Brazilians have taken to the streets since June in angry protests versus the huge divides that are beginning to open up in a society that has seen vast swathes of civilians miss out on the supposed miracle growth at the top.

Economists have raised their 12-month forecast for increases in consumer prices in Brazil to 5.93 percent from 5.83 percent in a weekly central bank survey published on Monday. Policy makers are increasing efforts to support the real after it declined 14 percent over the past three months, raising concerns that its slump will fuel inflation already running near the top end of the government’s target.

Brazil’s central bank is yet to access its $373 billion foreign reserves, up from $261 billion in 2010. An intervention plan announced on August 22nd will support swap and credit-line actions already announced this year totaling $45 billion.

However, there are nervous signs that Brazil’s small to medium sixes businesses are failing; Brazil’s business credit delinquency index rose 2.9 percent in July from the month before, the biggest increase since March 2013, according to Experian. Brazil has raised its target lending rate more than any major economy in 2013, increasing borrowing costs by 1.25 percentage point from a record low 7.25 percent in April.

 

Other emerging economies are also feeling the heat through their currency valuations

It’s not just India and Brazil who appear to be hitting a wall as evidenced by their falling currencies, Indonesia is under attack and Mexico’s peso also appears incredibly fragile. The rupiah spot rate has dropped 7.1 percent versus the dollar this quarter, the worst performer amongst Asia’s eleven most-traded currencies. Indonesian equities have slumped at the fastest pace worldwide during the current quarter due to concerns that the quickest inflation witnessed in four years will cause the central bank to tighten its monetary policy further after raising the benchmark interest rate in June and July. Inflation reached 8.6 percent in July, the fastest pace since February 2009. The current-account deficit swelled to $9.8 billion in the second quarter, the most going back to 1989, the central bank reported on Aug 16th.

Whilst currency traders naturally tend to focus on the major or cross currency/commodity pairs they’d be advised to keep an interest in the developments of the emerging economies and in particular the BRICS. From a macro economic policy should their growth begin to collapse the repercussions could be significant.

The belief is that the tightening of the USA monetary easing will impact these counties excessively, but that could be a lazy conclusion, what’s more likely is that these countries’ economies have simply run their term in this last classic global growth cycle.

With inflation beginning to catch fire, whilst interest rates are rising and the economies shrinking, it could provide a devastating and unique trinity of factors the likes of which we’ve not observed in recent times. The crushing disappointment for many citizens in the emerging economies is that they’ll have not experienced the personal benefits of growth before its snuffed out and the return to growth could take far longer than many economists anticipate.

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