Xinhua Headlines: Lira's tumble epitome of emerging economies reeling from speedier U.S. tapering
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E-mail Xinhua, December 6, 2021
BEIJING, Dec. 6 (Xinhua) -- The U.S. Federal Reserve began in November to reduce its monthly asset purchase program of 120 billion U.S. dollars by 15 billion dollars. Besides, investors' expectations of the first U.S. rate hike from the current record-low level of near zero have moved from 2023 into the middle of next year as U.S. inflation continues to run hot.
The expectations of a Fed tightening cycle earlier than expected have pushed up the U.S. dollar against other currencies and affected the flows into emerging markets, presenting a strong headwind for the development of emerging economies.
LIRA PLUNGE
Against the backdrop of the acceleration of the Fed's tapering and Turkey's annual inflation hitting almost 20 percent in October, Turkish President Recep Tayyip Erdogan, however, said he will never defend an increase in interest rates nor compromise on the issue.
In mid-November, Turkey's Central Bank lowered the interest rate from 16 percent to 15 percent, after which the Turkish currency slid to a historic low of over 10.92 liras against 1 dollar. The Turkish lira has lost more than 40 percent of its value this year against the U.S. dollar.
With the depreciation of lira, Turkey, which is heavily dependent on foreign countries for its energy needs, feels the global energy price increase "more acutely."
"This is depressing ... Almost every week, there is a hike," Ahmet Sari, a Turkish taxi driver, told Xinhua.
Lira's sharp decline has also badly hit the country's construction sector, which accounts for about 6 percent of the overall GDP and employs nearly two million people, amid soaring costs.
"Material prices have gone through the roof. The price of cement, ready-mixed concrete, sand, and steel has increased on a weekly even daily basis. Our business is reeling from this currency turmoil," Koray Sert, co-owner of a building materials company, told Xinhua.
"The depreciation is so significant that projects in big cities such as Istanbul or Ankara have come to a standstill. In the current situation, it is impossible to engage in new construction," Engin Atay, a contractor based in the capital Ankara, told Xinhua.
Moreover, with the rising inflation and living costs, Turks are now much less inclined to buy houses.
INSTABILITY IN EMERGING MARKETS
Turkey might be a rather extreme case, but similar pain has also been felt in other emerging markets. Non-resident portfolio flows into non-China emerging markets have turned slightly negative during the current quarter, according to the high-frequency tracking data released by the Washington-based Institute of International Finance (IIF) on Thursday.
"Underlying this overall picture is a lot of differentiation across individual emerging markets," the IIF said in an analysis, adding that Argentina and Brazil are among the most adversely affected and are both "in quasi financial autarky," as foreign investors steer clear of stocks and bonds in these countries.
Analysts have pointed out that emerging markets that export commodities and borrow in U.S. dollars, such as Argentina and Brazil, would be negatively impacted by the Fed's rate hikes.
Brazil's economy contracted slightly in the three months to September, government data showed on Thursday, as surging inflation, steep interest rate hikes and a severe drought triggered a recession in Latin America's largest economy.
The Argentine peso has fallen to historic lows against the dollar recently, aggravating the nation's persistent inflation.
Suffering from high inflation that is hitting the spending power of Argentinians, the country has sent an economic team to Washington to ink a deal with the International Monetary Fund (IMF) in order to emerge from the shadow of default and regain access to international financial markets.
Analyzing the reasons why emerging economies are in a bad position to weather U.S. Fed policy tightening, Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the IMF, told Xinhua, "They have record high debt levels and many of them have large budget deficits. This makes them very exposed to a change in investor sentiment which could be triggered by central bank policy tightening."
Emerging markets "should, while leveraging the historic general special drawing rights allocation, rebuild buffers as appropriate and implement structural reforms to insulate themselves from the damage from capital flow reversals and abrupt increases in funding costs," the IMF said in its latest Global Financial Stability Report. Enditem
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