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Emerging countries have come to depend heavily on overseas cash inflows to fund their current account deficits and have seen their currencies fall sharply over the past few months
Global stocks got off to a rocky start on Thursday, with eyes glued to emerging markets, after the Federal Reserve's decision to continue scaling back its monetary stimulus to the United States economy.
The Japanese stock market led declines, closing 2.5 per cent lower, as investors fretted about the potential toll that a stronger yen might be taking on the earnings of the country's export sector.
European markets were down slightly in midday trading, and index futures suggested that the Standard & Poor's 500 index, which fell 1 per cent on Wednesday, would be little changed at the opening bell in New York.
Emerging market currencies including the Turkish lira, South African rand and Indian rupee fell again. In a sign that the distress in emerging markets is creeping closer to the developed world, the Hungarian forint, which is closely tied to the euro, has also come under pressure in the last few days.
The Hang Seng Index in Hong Kong closed down 0.5 per cent, and Australia ended 0.8 per cent lower. In mainland China, which closes for a weeklong holiday starting Friday, the Shanghai composite index slipped 0.6 per cent.
The Fed's decision to roll back its economy-bolstering bond purchases by another $10 billion, announced on Wednesday by the departing chairman, Ben S Bernanke, had been widely expected in view of the fact that the United States economy appears poised for faster growth.
"The Fed statement gave a new lease on life" to the emerging market stress, which had started to fade on Tuesday, Tim Condon, a strategist at ING in Singapore, wrote in a note. Concerns about slowing growth in China are also likely to be "a source of occasional bouts" of emerging market stress this year, the note added.
Countries like India, Argentina, Turkey and South Africa have come to depend heavily on the overseas cash inflows to fund their current-account deficits and have seen their currencies fall sharply over the past few months.
Investors demand a substantial risk premium to hold emerging market assets, compared with developed world investments. Tighter monetary conditions in the United States make short-term American assets relatively more attractive and that translates into pressure on emerging markets.
The central banks of South Africa, India and Turkey have all raised their benchmark interest rates this week, and others, like Brazil, Indonesia and Chile, may follow.
Most emerging markets were relatively calm on Thursday morning, but, "The underlying fears are still there, and the situation is quite fragile," Lars Christensen, the head of emerging market research at Danske Bank in Copenhagen, said.
Christensen noted that the Turkish government had felt obligated to deny that it was planning to implement capital controls, with a government official telling Reuters on Thursday that such a move "is not on the table."
"Just the fact that they had to deny it shows the market worries that controls could be coming in some countries," Christensen said.
The interest rate increases that have been enacted thus far have done little to shore up confidence. The number of Turkish lira or Argentine pesos it costs to buy a dollar are both near record highs, and the South African rand is at its weakest since 2008.
The fact that currencies have continued to weaken even in countries that have started to raise interest rates "opens up a new, and potentially more worrying, phase" in which beleaguered policy makers find themselves unable to defend their currencies, analysts at Capital Economics wrote in a note on Thursday. They stressed, however, that it was important "to recognise key differences between individual emerging economies."
Christensen said there was cause for optimism in that "mostly what we are seeing so far is currency volatility, rather than economic distress."
Many of the emerging market central banks may be fighting a losing battle, he said.
"They actually need to allow their currencies to weaken to maintain growth and competitiveness," he said. "The damage to their economies from higher interest rates could be significant."
©2014 The New York Times News Service
