Turkey’s currency crisis sent ripples through global financial markets, but analysts say it isn’t necessarily a death sentence for all emerging-market currencies.
Indeed, “the factors that are driving the lira down appear mostly country-specific and so the slump in the lira should not trigger a full-blown currency crisis in most other emerging markets,” wrote Agathe Demarais[1], principal economist at the Economist Intelligence Unit. “Very few — if any — of them share similar characteristics.”
“The Turkey crisis is largely idiosyncratic, although its triggers are often external factors,” said TD Securities strategists led by Christian Maggio, head of EM strategy.
But even idiosyncratic problems can lead to a chain of dominoes to fall, warned Scott Minerd, global chief investment officer at Guggenheim Partners, calling on investors not to be complacent.
This week is showing us once again exogenous forces can spill into other markets. Contagion from the Thai baht decline in 1997 led to a global crisis….the collapse in the Turkish Lira (and problems in Italy, Argentina, India, and trade war rumblings) will run a similar course.
— Scott Minerd (@ScottMinerd)
See: Mark Mobius says Turkey capital controls would set a ‘very, very bad example’[3]
The selloff in the lira USDTRY, -7.1580%[4] weighed on sentiment and caused drops in other emerging currencies[5], even those that don’t face issues similar to Turkey, which is struggling with high inflation, a big foreign currency-denominated debt burden, and — perhaps most important — a president at odds with the country’s central bank.
Read: Strategists see 4 ways out of Turkey’s currency crisis[6]
The timing couldn’t be worse for emerging markets, which already struggled with the prospect of trade wars, as well as a strengthening U.S. dollar DXY, +0.47%[7] and rising U.S. interest rates.
The Federal Reserve’s monetary policy agenda, moving steadily along to normalization since late 2015, doesn’t help matters. The central bank began shrinking its balance sheet in October 2017 and is expected to raise interest rates for an eighth time in September, which is draining liquidity available for emerging markets.
“Our concern remains on the liquidity side, and the EM selloff is a manifestation of this tight liquidity,” wrote Morgan Stanley strategists Hans Redeker and Gek Teng Khoo, in a note. “Credits have withdrawn from risky investments since February.”
“Within a world of ample liquidity, recent EM developments would have a far smaller impact on price fluctuations and local liquidity,” said the...