Similarities with 1997 emerging markets crash only go so far
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.
However, economists said that such similarities only go so far. While there are clear vulnerabilities or evidence of economic mismanagement in several emerging markets, including Venezuela, Ukraine, Turkey and South Africa, the frailties that Argentina succumbed to are not broadly representative.
“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 that 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.
Underlining the nervousness in emerging markets, the Turkish lira fell to a record of 2.3070 to the dollar, while the South African rand fell to over 11 to the dollar from 10.98 in morning trade.
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 around 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 around 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 groups emerging markets into five separate 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 second group includes those countries that Mr Shearing says have “lived beyond their means” and have economies characterised by credit booms and large current account deficits. Turkey, South Africa, Indonesia, Thailand, Chile and Peru form this group – one that is particularly susceptible to US tapering.
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 last two groups are the bric countries – Brazil, India, Russia and China – all of which face domestic economic policy challenges. The fifth group includes those emerging markets – such as South Korea, Philippines and Mexico – that stand to benefit from a resurgence in export demand.