Fed Squeezing Developing Economies 08/15 06:10
WASHINGTON (AP) -- President Recep Tayyip Erdogan is blaming the United
States for Turkey's financial crisis, ignoring homegrown problems like high
debts, raging inflation and his own erratic policies.
Yet one of the threats facing Turkey and other emerging-market countries
really is made-in-America: By ratcheting up U.S. interest rates, the Federal
Reserve has --- unintentionally --- led investors to pull money out of emerging
markets like Turkey, strengthened the dollar's value and made it harder for
foreign companies to repay their dollar-denominated debts.
The resulting flight of capital into safer and higher-yielding U.S.
investments has sent many emerging-market currencies tumbling. The MSCI
Emerging Markets Currency Index has sunk nearly 8 percent since early March.
Especially vulnerable are countries with weak economic fundamentals: Runaway
inflation, bulging trade deficits, piles of foreign debt and paltry
foreign-currency reserves available to intervene in the markets to help prop up
their own currencies.
Turkey is Exhibit A: Inflation is running near 16 percent a year. The
country buys much more than it sells abroad. Its borrowing binge has left
Turkey highly vulnerable. Erdogan has rattled global investors by pressuring
the country's central bank not to raise interest rates --- the conventional
response to high inflation. High interest rates normally help strengthen a
nation's currency. But they also tend to slow economic growth, something
Erdogan clearly wants to avoid.
Erdogan has named his son-in-law as finance minister, blamed foreigners for
his country's woes and escalated tensions with Turkey's longtime ally the
The Turkish lira's value is down 45 percent against the dollar since early
March. Yet among the currencies of emerging economies, it's hardly alone:
Argentina's peso has lost 32 percent over the same period. That nation is
grappling with a corruption scandal and double-digit inflation. Argentina's
central bank just jacked up its benchmark rate to 45 percent.
Likewise, South Africa's rand has tumbled 17 percent. That country's economy
hasn't achieved even a modest 2 percent annual growth in five years. And it
runs a gaping deficit in its current account, the broadest measure of trade.
A crumbling currency inflicts many damaging consequences: Companies that
borrowed in dollars --- the global reserve currency --- have to come up with
steadily more money in their local currencies to repay U.S. dollar debts.
Having to do so also raises risks for the banks that lent to them.
That's the kind of squeeze that ignited the catastrophic 1997-1998 Asian
financial crisis. A currency disaster in Thailand infected the entire region,
and East Asian economies absorbed devastating damage.
Fears of a replay have gripped financial markets as Turkey's crisis has
intensified. "Contagion" is the word analysts use to describe their nightmare
of seeing Turkey's problems spread across the developing world.
Still, most economists remain optimistic for now that another such crisis
can be avoided. For one thing, Turkey's economy is uniquely mismanaged.
"Turkey is the No. 1 country we had our eyes on for a potential financial
crisis in the Obama administration," said Jason Furman, a Harvard economist and
a former chief economist for President Barack Obama.
Turkey's "economic circumstances are so different than many other emerging
markets," Furman said, referring to the country's debts and Erdogan's
And emerging-market countries learned lessons from the debacle two decades
ago. Many piled up reserves to fend off speculative assaults on their
currencies. At the start of 1997, emerging-market countries' reserves amounted
to barely 6 percent of their economic output. Now, they equal nearly 18
percent, according to the Institute of International Finance, a banking trade
"Emerging-market countries, on the whole, have much stronger financial
positions than they did 20 years ago," the Wells Fargo Investment Institute
said in a report Tuesday. Their foreign debts, for instance, have fallen from
38 percent of economic output in 1999 to 29 percent last year.
What's more, emerging-market economies, for the most part, appear relatively
stable. The International Monetary Fund expects them to collectively register
growth of roughly 5 percent this year and next, which would be the best showing
Turkey's troubles are "unlikely to trigger a meltdown --- just a fair bit of
volatility in currency and financial markets," said Eswar Prasad, a Cornell
University economist and senior fellow at the Brookings Institution.
"Turkey is in a crisis because of a particular potent mix of bad economics
mixed with even worse politics," Mandy Xu, a Credit Suisse analyst, wrote in a
More worrisome, Xu and others say, is the prospect of a sharp slowdown in
the Chinese economy, the world's second-largest after the United States.
China's growth slowed in the April-June period. Beijing has tightened lending
controls over the past year to stem a surge in debt. The IMF expects Chinese
growth to decelerate to 6.6 percent this year from 6.9 percent in 2017.
That slowdown poses at least a threat for emerging-market countries that
export raw materials to Beijing. Among those with the most to lose are the
Philippines, Russia, Malaysia, Brazil and Argentina, economist Vanda Szendrei
of Oxford Economics noted in a research report.
China's economy is also under threat from its escalating trade war with the
United States. Charging that Beijing deploys cybertheft and other predatory
tactics to try to surpass America's technological dominance, President Donald
Trump has imposed tariffs on $34 billion in Chinese products and is readying
taxes on an additional $216 billion.
Negotiations to defuse the standoff have gone nowhere.
"We really need to see a bit of a truce," said Gabriela Santos, global
market strategist at J.P. Morgan Asset Management.