By Ira Iosebashvili, Josh Zumbrun and Julie Wernau
A resurgent dollar is exposing weaknesses in the developing
world, pushing investors to unwind long-held bets on
emerging-market stocks, bonds and currencies.
Ripples from the dollar's comeback have spread. Indonesia's
central bank on Thursday raised interest rates for the first time
in four years to arrest a drop in its currency; Hong Kong's
monetary authorities last week stepped in to prop up the
territory's weakening dollar. The Turkish lira fell to fresh lows
against the U.S. dollar, while Brazil's real declined to its
weakest level in more than two years. The MSCI Emerging Market
Index, which measures stock performance, is down 11% from its
January highs as of Friday.
Investors have piled into emerging-market stocks and bonds for
the last several years, often glossing over important macroeconomic
or political issues as they sought returns that dwarfed those found
in the developed world. Now that the dollar is strengthening and
U.S. yields rising, those shortcomings are becoming more glaring. A
rising dollar makes it more difficult for countries to service debt
denominated in the U.S. currency, while rising yields diminish the
attractiveness of foreign assets.
"The markets are now realizing they have to pay attention to
fundamentals and assessing which countries are the most
vulnerable," said Mark McCormick, North American head of FX
strategy at TD Securities.
Investors are particularly nervous about nations with large
current-account deficits, which comprise goods and services, trade
and investment income, and those that rely on foreign investment to
finance government spending, or fiscal deficits. Their dependence
on the rest of the world for trade and government finances leaves
them badly exposed when the dollar rises.
Argentina, whose currency and stock market plunged in recent
weeks amid fears of a brewing financial crisis, carries both a
current-account and a fiscal deficit. Other emerging markets with
large current-accounts gaps include Turkey, with a deficit that
stood at 5.5% at the end of 2017, as well as Colombia, South
Africa, Indonesia, India and Mexico.
The current-account deficit "captures living beyond your means,"
said Robin Brooks, chief economist at the Institute of
International Finance.
Politics are another worry. Mexico's peso, a top performer last
quarter, has been dogged by concerns over the renegotiation of the
North American Free Trade Agreement and a looming presidential
election. Even the recent climb in oil prices has barely helped the
currency of oil-producing Russia, where worries of fresh U.S.
sanctions against Moscow have dented the ruble.
As volatility spreads throughout emerging-market assets,
investors who had arrived relatively recently are looking toward
the exits, said Tim Atwill, head of investment strategy for
Parametric Portfolio Associates.
"There is this large amount of new investors who have only
experienced the good days. They'll start leaving. They're not used
to the riskiness, " he said.
Jumps in the dollar and U.S. yields have burned emerging-market
investors before. Many developing countries borrowed heavily in
dollars and kept their currencies tightly pegged to the U.S.
currency in the 1990s. A swift dollar rally forced them to raise
interest rates and push up their own currencies to unsustainable
levels, damaging exports, hurting growth and eventually setting off
the Asian financial crisis in 1997.
Developing countries had largely loosened their currency pegs
and built up reserves by 2013. Still, many swooned that year when
yields shot higher after then-Federal Reserve Chairman Ben Bernanke
indicated the central bank might wind down its bond-buying program
in an episode known as the "taper tantrum."
Today, some emerging economies may be at least partially
shielded by robust growth rates, analysts said. The IMF's April
forecasts, made before the recent turmoil, projected India's growth
at 7.4% and expected both Indonesia and Malaysia to grow by
5.3%.
And others have shored up their finances. Countries including
South Africa, Mexico and Brazil have narrowed their current-account
deficits, and some have promised or launched economic and political
reforms.
Still, that may not be enough. While Asia's economies are
growing briskly, others are struggling: Argentina is expected to
grow at just 2% this year, Mexico at 2.3%, Colombia at 2.7%, Brazil
at 2.3%, and South Africa at 1.5%.
Plus, some analysts believe a continued rise in the dollar and
U.S. yields will punish comparatively healthy emerging markets
alongside more vulnerable ones. In 2013, for example, fears of a
slowdown in China and a drop in commodity prices sparked a
three-year drop in the MSCI Emerging Markets Index.
The stronger dollar "is slowing the flow of loose money floating
around the world, looking for something to do with itself," said
Kit Juckes, a strategist at Société Générale. "The world tends to
be a much happier place when the dollar is not going up."
Write to Ira Iosebashvili at ira.iosebashvili@wsj.com, Josh
Zumbrun at Josh.Zumbrun@wsj.com and Julie Wernau at
Julie.Wernau@wsj.com
(END) Dow Jones Newswires
May 21, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.