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Why are investors losing faith in currencies from emerging countries?

While the bullish market in the US is keeping the investors glued, the mounting financial risks in the developing economies are forcing investors to pull out slowly.  This is not a secret anymore; some developing countries are facing financial panic since the beginning of this year.  The high-spirited market condition in the United States is probably attracting investors who are selling off emerging market bonds, stocks, and currencies.  

It’s absolutely logical. Why should investors put their money on riskier investments around the world when they can put the same on a strong dollar which offers rewards in the form of higher interest rates and lesser risks? 

It’s not that these countries are witnessing crisis for the first time. In 1994, the Mexican peso faced trouble, so did the Thai baht in 1997, and the Russian ruble in 1998. Back then, the problem spread from one country to the other resulting in stress for developing countries. 

Of course, every developing economy has some or the other reason that is forcing them to fall apart slowly. On the other hand, at this point, the world’s biggest economies are not showing any signs of anxiety as of now. 

What are the factors working against South Africa? 

South Africa’s economy is being considered as one the riskiest ones around the world since the last few decades. Its unemployment rate has crossed 27 percent, and one in every four persons lives under extreme poverty. 

The country has managed to attract a lot of foreign investment during this decade. However, the government expenditure on large-scale social spending due to stark inequality has kept the treasury empty. 

The nation’s external debt was roughly around 27 percent of its GDP back in 2013. But, currently, it remains to be about 50 percent. Now, investors are slowly pulling their investments back. 

Since the starting of this year, the country’s currency has already lost 18 percent of its value. Plus, the state is in a recession, so, the central bank is not in a good position to increase the interest rate as well. As making changes in the interest rates won’t help, some extraordinary measures are required to bring the economy and indirectly the currency on the right track. 

The Russian economy is being isolated 

Russia is facing several trade sanctions since January 2017. The US has placed most of them for Russia’s trade links with North Korea, for its alleged role in poisoning a former spy and his daughter living in England, for supporting Syria’s Assad regime, and some for interfering in the American elections as well. 

Due to these sanctions in place, several international investors preferred to stay away from investing in the country directly. So, the demand for rubles remained less this year, and it lost 18 percent of its value this year compared to its last year price. 

Weak currency comes with other side-effects like making imports more expensive and triggering inflation. Both the factors slow down the growth. 

Thankfully, the country’s low level of debt allows it to keep the economy attractive by investing more in infrastructure, social welfare, and health care. That’s exactly what Russia is planning to do during the next few months.

The government may also have to take some unpopular decisions and reshuffle spending from the unnecessary expenditure. Such choices may do a little good for the economy but can probably impact President Vladimir V. Putin’s popularity as well. 

Some countries are considered credible enough to handle the crisis 

May it be Turkey, Russia, South Africa, Argentina, India, or any other economy that’s facing trouble, the nation’s recovery depends on five factors.   The amount of foreign currency that it holds, deficits, refinancing needs, dependence on international lenders, and the level of the interest rate are the five factors. Every country has some or the other unique vulnerabilities that force it to react to market pressures in a certain way. There is no way to estimate if this phenomenon will spread to other countries or not.  The jittery investors from around the world are jumping from one sinking ship to the other. Countries that owe a lot of international debt are lesser attractive, and Turkey has topped the list. 

Last, but not the least, the nation’s credibility in the market is another factor that can help it to get out of worse conditions. Even in spite of ugliest levels of debt, the investors might continue holding the concerned country’s currency if they have faith in the nation’s ability and credibility to repay. Even forex traders who believe in using a long-term investment trading strategy might prefer to wait and watch for a few months if they believe in the particular country’s economic policies and political leadership. 

Indonesian Rupiah may get out of trouble earlier than other Asian currencies

Almost every emerging country which is facing the heat these days is blaming rising oil prices a strong dollar for their troubles. However, no one wants to discuss the trader sentiment that’s just not in favor of these risky economies.  Most of the investors in these economies happen to be foreign investors instead of locals, such emotions and trade tensions matter a lot. Thus, emerging markets remain the most vulnerable to investor sentiments.  The only good news is that these sentiments are not impacting businesses as much as they are hurting currencies in these markets. Company earnings in these countries do not show much of damage as of now. 

Khoon Goh, the Asia Research Head for ANZ recently shared his opinion on the issue. He pointed out that out of the list of Asian emerging countries; the Indonesian Rupiah is not looking as bad as the Indian rupee. Indonesia has reported an increase in its growth rate during the second quarter of this year. The country’s policymakers are trying to stabilize their currency to control the contagion fears, as almost all the Asian countries are expected to remain venerable to trouble at least until the end of the year.  



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