Emerging market currencies have been steadily falling against the dollar over the past year on rate rise speculation in the US and declining commodity prices, particularly crude oil. But with the worsening slowdown in the Chinese economy and the recent turmoil in China’s stock markets, their depreciation has accelerated in recent weeks. Low liquidity in financial markets has also contributed to the exaggerated volatility in currency markets.
The prospect of interest rates going up in the US has led to large capital outflows from emerging markets in Asia, driving down their currencies, as investors move their capital to less risky assets. It is estimated that the capital outflows have reached $1 trillion during the past year, exceeding the amount that followed the 2008 financial crisis. But other emerging market economies outside of Asia have also seen their currencies tumble, mainly on combined commodity weakness and political instability.
Indonesia and Malaysia have been one of the worst hit countries in Asia due to their close trading links with China. But so far, their central banks have resisted in devaluing their currencies. The Malaysian ringgit is down over 30% in the past year against the dollar and the Indonesian rupiah is down 20%. Thailand’s economy hasn’t been immune either to slowing demand in China and the recent attacks in Bangkok have pushed the baht lower.
Other central banks have succumb to the market pressures and devalued their currencies. The State Bank of Vietnam has devalued the dong three times this year and widened the trading band. Kazakhstan also devalued its currency, the tenge, on plummeting oil prices, which is its main export. China’s devaluation of the yuan was less severe and has fallen by only around 3% against the dollar. But the move was unexpected and signalled acknowledgement by Chinese authorities that the economy is faltering.
Falling commodity prices have also had a major impact on Brazil, South Africa and Russia. The Brazilian real has plummeted by almost 60% against the dollar in the past year with the economy now on the verge of recession. Corruption scandals and slow economic reforms have added to the impact from the commodities slump. South Africa’s currency, the rand, has hit 14-year lows as its economy is dependent on mining exports. Meanwhile, the Russian ruble is moving closer to the lows seen in December 2014 when the country was battling the drop in oil prices, international sanctions and tensions over Ukraine.
Turkey, whose economy is not as dependent on commodity prices, has also seen its currency, the lira, fall to record lows against the dollar. Political uncertainty, rising tensions with PKK and slowing demand in its major trading partners has damaged economic growth prospects in the country.
Not all emerging markets have been caught up in the latest market turmoil though as most central and eastern European economies have been resilient to the latest developments. Countries such as Poland, Czech Republic and Hungary saw robust growth in 2014 and will only see slight moderation in growth in 2015. Low exposure to China and commodity prices has allowed the region to benefit from the improving outlook in the Eurozone, while remaining outside the Euro-area gives them more flexibility over setting monetary and fiscal policies.
The outlook for emerging markets is unlikely to improve dramatically in the near future as production oversupply is forecast to keep oil prices near current low levels into 2016. The slowdown in China is not expected to abate anytime soon either as Chinese authorities are seen to be behind the curve in responding to the market and economic developments.