Mexico, Turkey, South Africa and Brazil are known as attractive holiday destinations in southern climes. The emerging countries have even more in common: The value of the currencies melted like ice in the sun in the corona pandemic. And just as the tourists stayed away, so did investors distance themselves from the peso, lira, rand and real and the once solidly growing economies. In some cases, the means of payment have devalued by 50 percent against the euro.
Corona vaccines are now on the way, which give great hope worldwide. Not only are the battered stocks of corona losers recovering, but also the long-suffering emerging market currencies. There are also other factors: In Turkey, for example, there was a change in the finance minister and central bank governor. In mid-November, the Turkish Lira had its most successful week in 19 years. However, the previous fall with minus 26 percent since the beginning of the year against the euro was hard and deep. The real, peso and rand have also increased significantly in the meantime. So it’s high time to consider getting started.
It’s all about the vaccine
The upswing is clearly being driven by the announced vaccines, which give hope for a recovery in the global economy and tourist flows. Robin Brooks, chief economist of the Institute for International Finance (IIF), wrote on Twitter: “A vaccine will unleash a rally in emerging market currencies against the dollar.” This also applies to the euro, even if it is currently is in stronger shape than the dollar. Market observers are already registering a greater willingness to take risks on the part of investors, from which the corresponding currencies could benefit. The chances of a new start are all the better since the respective economies have collapsed more than those of the USA and the euro zone. Mexico’s GDP, for example, will fall by ten percent this year, while that of the USA will probably only drop by four. Only the Turkish economy is doing comparatively well.
The collapse of GDP and currency is also due to the fact that these countries had and still have far fewer opportunities to support their economies with measures worth billions. After all, like the state budget in general, especially in times of crisis, the packages are financed to a large extent through massive new borrowing or bond sales. The general conditions were rather bad for both, and buyers of high-risk government bonds weren’t in line. In addition, many debts, both government and corporate, are often quoted in US dollars – which, in view of the softening of the domestic currency, makes repayment more complicated and the credit burden heavier. All of this deterred investors. Lucky in bad luck: the dollar is currently weak. If it stays that way, it would be an advantage for the emerging countries – just like the devaluation itself. From the point of view of the domestic economy, it makes exports cheaper and imports more expensive.
Gradual return to work
So the wind has turned again – and daring investors should consider getting into emerging market currencies or government bonds. Commerzbank sees Turkey and South Africa ahead of the four-man squad, especially since Turkey’s economy is doing surprisingly well in the pandemic year. Far better than many other countries and certainly their own currency. At the end of last week, the new head of the Turkish central bank, Naci Agbal, increased the interest rate from 10.25 to 15 percent. The lira appreciated immediately, which could improve loan repayments in foreign currencies and help the economy. Meanwhile, Turkey recently had an inflation rate of twelve percent. The rate hike should, according to the doctrine, dampen the inflation (an express goal of this measure), because it makes loans more expensive. The decisive factor will now be whether the markets regain confidence in monetary policy. In Turkey in particular, President Erdogan is known to intervene directly and impulsively in monetary policy. He detests high interest rates and according to experts he should only tolerate them temporarily. For this reason, buying currencies or government bonds there, as elsewhere, should initially be limited and then gradually expanded.
Author: Manuel Heyden
(M. Sc., Born 1980) is co-founder and CEO of nextmarkets.