January 24, 2014 9:55 am
Similarities with 1997 emerging markets crash only go so far
Argentine currency’s drop shows broader frailties but is seen as extreme
Suddenly, it feels like 1997 all over again. The biggest one-day swoon of Argentina’s peso on Thursday was more than a little reminiscent of the day 16 years ago when the Thai baht was driven into free fall, triggering a wave of contagion through Asia.
“Argentina is probably a special case,” said Neil Shearing, chief emerging markets economist at Capital Economics. “The problems that we have seen in Turkey, Ukraine and Argentina have led to talk of a new emerging markets crisis. But this misses the key point that emerging markets are very different from each other.”
Craig Botham, emerging markets economist at Schroders, said a flurry of investor nerves following the Argentine shock was centring on Latin America with “people pulling out while they reassess what is going on”. He added that Brazil, which has been intervening to stem currency depreciation in a way similar to Argentina, had come in for extra scrutiny.
Turkey, which has seen its lira fall more than 6 per cent this year, is attracting added concern because of a trend among its citizens to seek refuge in the dollar, another characteristic of Argentina’s economy before Thursday’s currency decline.
However, economists emphasise that, while some emerging markets share some characteristics with Argentina, few suffer from so pronounced a mix of domestic economic mismanagement and external frailties.
Buenos Aires, beset with a large current account deficit and meagre foreign currency reserves, allowed domestic inflation to reach about 25 per cent, driving its citizens to seek a store of value by changing their pesos for dollars.
When the government cracked down on this and limited imports, it nurtured a large black market for dollars, shattering international confidence in the peso. Venezuela has many similar issues, with a black market rate for the bolivar running at about 10 times the official rate of 6.3 to the dollar. Ukraine, convulsed by domestic strife, is seen as particularly vulnerable to economic dislocation. The trio of Argentina, Venezuela and Ukraine are ranked by credit rating agencies as among the least creditworthy nations.
Mr Shearing divides emerging markets into five groups, based on perceptions of their weaknesses in a world conditioned by the tapering of monetary stimulus.
The most vulnerable category, that defined by “serial economic mismanagement”, includes Argentina, Ukraine and Venezuela. The problems of these countries are largely self-inflicted.
The third group, that wrestling with the legacy of booms, are eastern European countries such as Hungary and Romania that are vulnerable not so much to US tapering but the unwinding of monetary stimulus by the European Central Bank.
The next group are the bric countries – Brazil, India, Russia and China – all of which face domestic economic policy challenges. The final group includes those emerging markets – such as South Korea, Philippines and Mexico – that stand to benefit from a resurgence in export demand.
Copyright The Financial Times Limited 2014
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