Emerging Markets Beset by Struggling Currencies and Increasing Outflows as US, Europe Recover

Michael Teague  |

Improving economic conditions in the US coupled with Europe’s recent climb out of recession spurred an outflow of cash from Asian and emerging market countries over the weekend. As a result, both the Indian and Indonesian stock markets dropped precipitously to start a new week of trading on Monday.

Southeast Asian countries in particular have struggled with declining currencies ahead of the commencement of the Federal Reserve’s rolling back of fiscal stimulus spending, largely expected to begin in earnest next month. The problems have been compounded by China’s overall slower growth and tightening of liquidity as the government of the world’s most populous nation has stepped up efforts to pre-empt a bubble-economy that could spiral out of control.

Emerging market ETFs have seen a capital flight of over $8 billion in 2013, while US-based ETFs have added some $95 billion.

India, which has become accustomed to being considered one of the brightest and most promising emerging market stories, has resorted to drastic measures lately to reduce its current account deficits. The country has pushed through several measures in recent months to curb gold imports in order to save the increasingly anemic rupee. On Monday, the nation’s benchmark index (SENSEX) dropped over 1.5 percent by the end of trading.

The situation was even more worrisome in Indonesia, where the Rupiah dropped to 10,500 against the dollar while stocks dropped to its lowest level in almost two years, as the Jakarta Composite Index (JCI) ended the day 5.6 percent lower on unusually high volume trading. The country has also suffered from the effects of inflation, as well as an expanding current account deficit, as lower prices for key commodities such as palm-oil, coal, and tin have led to painful losses.

In Thailand and Taiwan, similar scenarios can be seen playing out, as both countries have taken on far more debt in 2013 in order to support economies with worsening growth and export forecasts.

While India’s moves against gold in particular have been cast as a desperate attempt to stem the outflow, chief economist at the Bank of Singapore Ltd. Richard Jerram has said that the declines are more representative of a correction, “a good structural story based on the underlying domestic demand,” rather than an economic situation that is unstable from the perspective of fundamentals. “What you see at the moment is reaction from expectations being unrealistically positive maybe 12 months ago, to now becoming more realistic,” Jerram said.

[Image: A Map of Developped (pink) and Emerging Markets (blue), courtesy of Wikimedia Commons]

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