Some emerging economies, including Turkey and Argentina, could be forced to cut spending to bridge yawning deficits. As interest rates continue to rise in the US and Europe, there is no respite for them any time soon.
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Turkey, South Africa and Argentina are among the emerging economies most at risk of recession, chief economist for business information provider IHS Markit, Nariman Behravesh, told DW.
The countries, which have seen their currencies battered this year, have "twin deficits" and large amounts of dollar and euro-denominated debt.
An economy suffers from twin deficits when it has a fiscal deficit — when a country's expenses exceed its revenues — and a current account deficit, which means the value of the goods and services a country imports is more than the value of the goods and services it exports.
"Unless they can get help from the IMF or some kind of debt relief, the most indebted countries have little choice but to raise interest rates and tighten fiscal policy," Behravesh said. "They can also impose capital controls, but this is usually only a short-term fix and tends to drive away foreign investors."
Behravesh added that these economies took on too much debt when interest rates were low and are now "living with the consequences of rising global interest rates."
The Turkish lira and Argentinian peso have depreciated by over 35 and 50 percent respectively against the US dollar in 2018. The South African rand has fallen more than 10 percent.
Currency woes to continue
The currencies of Turkey, Argentina and South Africa and a host of other emerging markets, including India, will continue to be under pressure, IHS Markit said, adding that the Ukrainian hryvnia will be the most vulnerable.
Ukraine suffers from chronic current account and fiscal deficits, high external debt exposure and inflation, and meager foreign exchange reserves.
"Emerging markets will remain susceptible for a least another couple of years as interest rates in the US and Europe rise," Behravesh said. "We don't expect interest rates in the developed world to top out until 2020."
Emerging market currencies had depreciated on average by about 8 percent by the end of September 2018.
Oil concerns
Rising oil prices are further expected to hurt emerging market currencies, including the Indian rupee.
"Rising oil prices are a growing headache for oil-importing countries, whose current account deficits will deteriorate," Behravesh said. "IHS Markit predicts that oil prices will remain above $80 (€69) per barrel (Brent) for at least another year."
Oil prices, which have risen nearly 40 percent in the past year, were hovering around $80 per barrel on Thursday.
Reuters news agency reported last month that Indian refiners were considering cutting back their imports as oil traders forecast crude oil to rise to $100 a barrel by the end of the year.
No global financial crisis
The ongoing trade war between the US and China, which has seen the two countries slap tariffs and counter-tariffs on each other's goods, is also expected to weigh on the currencies of emerging economies.
"Trade disruptions will likely hurt Asia's economies the most, but a weaker Chinese currency could have a broader negative impact on all emerging market currencies," Behravesh said.
But the IHS chief economist said the current turmoil was unlikely to turn into a crisis like the Asian financial crisis of the late 1990s mainly because of the foreign-exchange war chests most emerging markets have built since then and a different process they have adopted to determine foreign exchange rates.
"The emerging market countries ... have either a floating or managed-float exchange rate compared with the countries that operated under currency pegs in the Asian financial crisis," he said, referring to an exchange-rate system in which a country pegs its currency's value to that of another country's currency.
Turkey's currency crisis explained
The Turkish lira crash is threatening to turn into a debt and liquidity crisis. DW explains how the lira got to this point.
Image: picture-alliance/A.Gocher
The big picture
Turkey is in the throes of a full-blown currency crisis, with the Turkish lira losing nearly 45 percent of its value since the start of the year. The currency crisis threatens to plunge the world's 18th-largest economy into a financial crisis and trigger contagion in emerging markets and Europe.
Image: Getty Images/C. Mc Grath
Search for yield
Turkey has traditionally suffered from a large current account deficit. This difference between import and export of goods and services has been filled through external borrowing in foreign currency. A decade of easy money and low interest rates in the United States and EU following the 2008 financial crisis led to investors searching for higher yields to emerging markets like Turkey.
Image: AP
Credit-fueled growth
The external funds entered the Turkish economy to finance deficits, massive government spending and company borrowing. Credit-fueled growth helped the Turkish economy grow and boosted the government’s popularity through increased consumption and major construction projects. Here, road paint reads: "Slow down."
Image: Getty Images/AFP/O. Kose
Reducing exposure to emerging markets
Investors have pulled back money from emerging markets in recent months as the US Federal Reserve has steadily raised interest rates and is cutting back on easy money policies in response to a robust American economy. This has caused the dollar to increase, the lira to fall, and Turkish bond yields to rise.
Image: Getty Images/S. Platt
Loss of confidence in Erdogan's strong hand
The pressure on Turkey is reflective of broader trends in emerging markets, although the lira is by far the worst performer. That's because investors have lost confidence in management of the economy under President Recep Tayyip Erdogan, who believes in unorthodox economic policy, demands low interest rates and constantly assails "the interest rate lobby." Inflation is at 16 percent a year.
Image: Getty Images/AFP/B. Kilic
Trump's tweet shakes markets
On August 10, US President Donald Trump announced higher tariffs on Turkish imports of steel and aluminum. The tariffs themselves are minor and impact around $1 billion (€875 million) in trade, but they weighed on market confidence in the vulnerable Turkish economy. Even more, Trump’s direct reference to the Turkish lira sent the currency tumbling.
Image: Twitter/Trump
Frenemies
The imprisonment of US pastor Andrew Brunson has weighed heavily on relations, leading to a series of escalations. Ties between the two NATO allies have also nosedived over US support for Syrian Kurdish forces, Ankara's plans to buy a Russian missile system and Turkey's demand that Washington extradite US-based Islamic cleric Fethullah Gulen, whom Erdogan blames for the failed July 2016 coup bid.
Image: Reuters/K. Lemarque
One man show
Poor relations between Washington and Ankara have added to Turkey's economic woes, but given broader fundamentals it is only a proximate cause of the market mayhem. More than 30 percent of the lira’s loss has come since June, when Erdogan took over the office with new sweeping powers. Erdogan's authoritarian hand has distanced the country from traditional Western allies and hit confidence.
Image: picture alliance/AP Photo/E. Gurel
Albayrak: the son-in-law
After winning a June election, Erdogan spooked markets when he tightened his control over the central bank. Instead of appointing technocrats, Erdogan appointed his son-in-law Berat Albayrak (pictured) to lead the newly empowered Finance Ministry. This has raised concerns over the central bank's independence given the president’s repeated statements against raising interest rates.
Image: picture-alliance/M. Alkac
'Economic war'
Erdogan has not inspired confidence in responding to the lira meltdown. He speaks of "economic war" and a "campaign" waged by external powers designed to weaken Turkey. Instead of taking drastic action to shore up confidence, such as raising interest rates or going to the International Monetary Fund (IMF), the government is couching itself in nationalistic rhetoric of sacrifice.
