Emerging markets currencies have been the victims of a stronger US dollar, free-fall in crude oil and commodities markets, monetary mismanagement, geopolitical risks and the decline in Chinese economic growth. I have written successive columns recommending strategic shorts on the Indian rupee, Russian rouble, South African rand, Turkish lira, Brazilian real, South Korean won and Malaysian ringgit since 2011. The sanctions, Ukraine war, capital flight, recession and capricious Kremlin policies have made the rouble the worst-performing major currency in the world, at 55 to the dollar. This is far worse than the post-Lehman lows of 2008, when Russian banks faced systemic threats and the Kremlin ordered Russian troops to intervene in Georgia. The rouble prices in capital controls and not even a 9.5 per cent central bank policy rate has ended the panic selling in the money market.
Not even the nuttiest gold bug can now deny that commodities are mired in a vicious bear market that could last for at least the next two years. A world in which iron ore drops 70 per cent from its highs, Brent crude drops $50 a barrel in six months while a self-styled terrorist “caliphate” controls land in Iraq and Syria double the size of Jordan and Dr Copper flashes a macro SOS, emerging markets currencies, debt and equities are in trouble. Take Turkey, for instance. Even though the Turkish current account deficit has fallen from 8.5 per cent in the summer of 2013 to less than six per cent now, the free-fall in commodities also means a free-fall in capital inflows into emerging markets economies. The result? A lower lira as volatility in the global currency dollar spikes higher. The IMF estimates lira is overvalued by 10-20 per cent and warns Ankara about offshore hot money to finance its current account deficit. Unfortunately, countries like Russia, Brazil and South Africa cannot take advantage of even a major fall in their currency since their manufacturing export industries are not globally competitive or technologically preeminent, with few exceptions.
India has demonstrated that a pro-reformist government and a credible central bank can boost capital flows and rescue a currency from even a global crisis of confidence, as happened to the rupee in August 2013, when it fell below 68 against the dollar. However, even the rupee has not been immune to the dollar strength and depreciated from 60 to 62 in the past three months, despite the free-fall in crude oil that has narrowed the current account deficit and helped reduce consumer/wholesale inflation. If the rupee cannot appreciate in the current macro milieu, energy and metal exporting emerging markets currencies have no hope.
The GCC currencies are pegged or linked to the dollar, yet with local inflation rates that are five to eight times higher than the two per cent US CPI rate, thanks to speculative property bubbles that are now in the first stages of another epic blow-up. The GCC currency pegs mean that a surge in the dollar when crude oil prices tank is a deflation shock since regional liquidity cycles are invariably correlated to government spending budgets. It is no coincidence that past property and banking crashes in the Gulf coincided with periods when the US dollar was rising — in the early 1980s under Ronald Reagan, in the late 1990s under Bill Clinton, in 2008-09 under George W. Bush. I have been warning my friends, readers and fellow investors in the Gulf about the strong dollar, an oil crash and a stock market crash in the Gulf for months. Well, the Austrian School macroeconomics helped me avoid a financial bloodbath on my own account again now that the GCC markets have fallen 25 per cent!
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: [email protected]
