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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 
United States.

   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 
unconventional policies.

   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 
group.

   "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 
since 2013.

   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 
research report.

   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.


(KA)

 
 
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