Emerging markets have the fundamental problem that their own domestic markets – while promising – are not large enough yet to raise the finances needed to drive their entire economies. They are critically dependent upon foreign investment. And now as funds return to the dollar, India, Brazil, South Africa and other emerging markets are feeling the global financial heat – and some of the heat is intense enough to cause some currency meltdowns.
The Indian economy is shrinking in real terms. Currency controls are on the way though the Indian government is – as usual – doing too little too late. Sovereign ratings of these countries are likely to be degraded which will reduce foreign investment further and raise the cost of foreign borrowing. A vicious downward spiral could ensue.
BRICS is losing BIS.
A fierce selloff in many emerging currencies shows no sign of abating as the expected withdrawal of US monetary stimulus prompts investors to shun markets seen as riskier because of funding deficits, slowing economies and inflation.
The rupee fits that bill, as do the Indonesian rupiah, the South African rand and theBrazilian real. The rupiah plunged to four-year troughs on Monday while the rand lost another 1 percent to bring year-to-date losses to almost 17 percent against the dollar.
Brazil’s real extended last week’s fall of more than 5 percent fall to trade at its weakest level since March 2009 even as the central bank sold nearly $3 billion worth of currency swaps, which are derivatives that mimic an injection of dollars in the futures market. Like the rupee, it has been hammered by doubts over the efficacy of policy actions to stem the rout.
The rupee and the real, respectively, have been the worst performers in Asia and Latin America since late May when the Fed first signalled that it may begin winding down its monetary stimulus this year. India’s currency has lost 13 percent against the dollar this year while the real has plunged 15 percent in the same period.
A decline in the Fed’s bond purchases will push government debt yields higher, which should raise the attractiveness of the dollar and dollar-denominated assets. In Brazil, the currency weakness has complicated policymakers’ efforts to rein in inflation, leading many investors to bet the central bank may speed up the pace of monetary tightening next week.
In India, the rupee’s sell-off threatens to drive Asia’s third-largest economy towards a full-blown crisis.
“Our primary concern is that the policy authorities still don’t ‘get it’ – thinking this is a fairly minor squall which will simmer down relatively quickly with fairly minor actions,” Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, wrote in a note on the Indian currency on Monday.
The k2p blog 