30-1-2014 Rate Increases Fail to Stop the Bleeding in Emerging Markets -- Wall Street Journal Surprise rate increases by central banks in embattled emerging markets have failed to conclusively stop the bleeding -- and could even make matters worse for their economies. Turkeys central bank raised its benchmark interest rates by a sizable amount overnight Tuesday, and South Africas central bank delivered an unexpected rise overnight Wednesday. That follows similar increases in beleaguered markets like India and Brazil. Turkeys radical move helped calm global markets Wednesday, but the relief was temporary: Markets resumed their selloff Thursday in the wake of the U. S. Federal Reserves decision to taper its bond-buying program by another $10 billion a month. Meanwhile, the impact of higher rates on emerging-market economies will not be so fleeting. Emerging-market central banks are in a difficult situation, said Tim Condon, head of Asia research at ING in Singapore. Its not clear that interest-rate hikes are the proper thing in this instance: Theyre going to see slow growth and slow government revenue but government spending tends to be stickier, so these moves may even exacerbate whats at the root of the problem. That, essentially, is deficits -- in government budgets and current accounts. Twin deficit countries have borne the brunt of the selloffs that roiled emerging markets in the middle of last year and again at the start of this one. Rate increases are a double-edged sword: Swift moves in India and Indonesia to raise rates after last summers taper-related selloff helped improve the trade balance and restore investor confidence. But the cost has been a sharp fall in the growth rates that attracted investment in the first place. And theres no guarantee that remaining imbalances wont cause problems down the road. But at least the rate increases in India and Indonesia were accompanied by deeper structural reforms that should put those economies on surer footing for the long run. While clearly inspired by the taper selloff, those rate moves reflected a plan, not panic. One feature of this months renewed turmoil had been the apparent differentiation among emerging markets. India, Indonesia and other Asian markets that took stringent measures to address their weaknesses since last summer -- such as Malaysia -- had fared far better than countries such as Turkey or South Africa that remained exposed. Thursday mornings selloff has been widespread, however, uggesting a general flight to safety as the prospect of higher U.S. interest rates sinks in. It may also reflect a fear, as HSBC chief economist Stephen King hinted on Twitter, that investors anticipate a political backlash against this weeks emergency rate moves. Still, the Fed decision had been well-telegraphed and should have been no surprise to markets. Thats an ominous sign: That a huge rate hike could not outweigh an already-priced-in Fed taper is clearly bad news for EM FX ahead, Rabobank wrote in a research note Thursday. It didnt help that the Fed made no reference to the renewed turmoil in emerging markets. Not that the U.S. central bank necessarily should be expected to mention this, but its absence may have spooked nervous investors with their fingers already on the sell button. It sent a message of indifference to the plight of emerging markets, INGs Mr. Condon said. The knee-jerk reaction is to sell everything and only afterward look around and see whether the economic fundamentals really warrant it. I think the selling will be short-lived, but its another day that the likes of South Africa, Turkey and Argentina dont need.
Posted on: Sun, 02 Feb 2014 02:29:45 +0000
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