Currency Crisis Does not mark the Beginning of the End of the Emerging Market Dream


The existing currency crisis in emerging markets is leading to much debate about whether this signifies the end of the emerging market dream. The decision of the Fed to wind down its quantitative easing programme, which will herald the end of cheap credit, has led to capital outflows and weak currencies across emerging markets.

Current account deficits add to pressure

Particularly vulnerable are those with large current account deficits including India, Turkey, Brazil and Indonesia – between them accounting for an estimated 8.1% of global GDP and 20.9% of emerging market GDP in US$ terms in 2013. This is because they are more reliant on inflows of
foreign capital. This can be offset to some extent by large foreign reserves, but these reserves can soon dwindle should the government be forced to support the currency.

Current Account Deficits and Foreign Exchange Reserves of Selected Emerging Economies: 2013

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Source: Euromonitor International from national statistics/International Monetary Fund (IMF), International Financial Statistics (IFS)

Currencies on the slide

During 2013, many emerging market currencies have weakened significantly against the US$. The largest falls amongst major emerging markets include India, Brazil, Indonesia, Turkey and South Africa.

Depreciation against US Dollar of Selected Emerging Market Currencies: February 2013 – August 2013

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Source: Oanda

Note: Data refer to Average weekly BID rates from week commencing 4th February. INR = Indian Rupee, BRL = Brazilian Real, IDR = Indonesia Rupiah, TRY
= Turkish Lira and ZAR = South Africa Rand.

Weaker currencies bring with them advantages to exporters – but they must be in a position to capitalise on the advantage – on the other hand they also bring inflationary pressures as imports become more expensive. This in turn leads to pressure to raise interest rates. The fear is that weaker currencies could lead to an inflationary spiral and even “stagflation” (a period of sluggish economic growth and high inflation) as the crisis is coming alongside a period of slower economic growth in many emerging markets.

Stronger positions than in previous crises

Despite this I would argue that we are not seeing the end of the emerging market dream or a re-run of the 1997 Asian Financial Crisis but rather a serious, but shorter-term, problem that unlike in the past many governments will be able to overcome. This is because, despite their challenges, the long-term fundamental position of many emerging markets remains broadly positive and their macro-economic positions are stronger now than they have been in the past.

Nevertheless, the past few months have shown how quickly foreign reserves can diminish and how economic growth can stall so governments need to use this crisis as an opportunity to re-focus reform which would act to boost growth and competitiveness. On the global political stage the world’s major emerging markets are in a stronger position than they were in the past and South Africa has called for the G20 to deal with the currency turmoil through greater international coordination. The BRICS countries (Brazil, Russia, India, China and South Africa) will also meet alongside the main G20 gathering. Although significant progress at the G20 summit on the 5th-6th September 2013 is unlikely, these discussions point to the greater influence of emerging markets globally.