Emerging Markets Lose Their Luster as Crises Mount
By LANDON THOMAS Jr.
In Russia, it’s assassinations and war. In Brazil, a corruption scandal may derail the economy. And in Turkey, the president is attacking the country’s senior central banker.
Emerging markets, not long ago seen as a necessary ingredient for the common portfolio, have lately taken on a more toxic quality as messy politics and staggering economies are prompting some investors to reassess their investment rationale.
Compounding these concerns has been the dollar’s upward march and the growing acceptance that the Federal Reserve will soon increase interest rates as the United States economy outpaces the rest of the world’s.
Emerging-market currencies, an accurate barometer of investor mood swings, are now suffering the consequences. The Turkish lira and the Brazilian real have touched multiyear lows against the dollar while the Russian ruble remains volatile after its 65 percent plunge.
Even the currencies of economies seen to be in better shape, like the Mexican peso, which is trading at record lows against the dollar, and the Indian rupee are under pressure.
“You are seeing all the bad things about emerging markets that originally made them sub-investment grade,” said Daniel Tenengauzer, an emerging-market specialist at the Royal Bank of Canada. “The whole thesis that emerging markets are emerging is being questioned right now.”
Mr. Tenengauzer points to Brazil as the main culprit. Allegations of kickbacks and bribes at Petrobras, the country’s energy giant, threaten to engulf the country’s business and economic elites. Petrobras, which has relied on global bond markets to finance its ambitious investment plans, is now retrenching — a bad omen for Brazil’s investment-starved economy, which is not expect to grow this year.
But the outlook is no better in Russia, where a war with Ukraine and President Vladimir V. Putin’s erratic ways — combined with a collapse in the price of oil — have rattled investors. And in Turkey, the country’s president, Recep Tayyip Erdogan, has added to existing currency jitters by suggesting that the head of the Turkish central bank is beholden to foreign speculators because he has not lowered interest rates fast enough.
Beyond these surface problems are deeper vulnerabilities in these and other emerging markets that, analysts say, will become more acute as the dollar continues to race ahead.
In a report published last week, Mr. Tenengauzer highlighted how, in the last five years of extraordinary central bank easing, emerging markets have taken on more debt as developed markets have done the opposite.
This dollar-based leveraging up has been led by capital-hungry companies that cashed in on a broad investor desire for high-yielding bonds. Chinese short-term debt has exploded to $850 billion from $101 billion since 2008; in Brazil, the increase was to $112 billion from $47 billion, and Turkey’s near-term liabilities jumped to $95 billion from $56 billion.
When their currencies were strong and the dollar weak, such a strategy made sense. But when the reverse is true, foreign investors take their money elsewhere, and these dollar debts become harder to pay off.
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Of course, it is a mistake to treat emerging-market problems as uniform. For example, while Brazil and Russia suffered last year, stocks and bonds soared in India under a new reform-minded government. Indonesia, Taiwan and the Philippines also attracted investor interest because of their successful economic policies.
And while currencies have been volatile, capital flows out of emerging markets, although weaker of late, have not yet approached the levels of a year ago.
According to the Institute of International Finance, the trade group for global banks, global flows into emerging markets nearly halved last month, to $12 billion from $23 billion, with money flowing out of Brazil, Ukraine and Thailand and into Indonesia and India.
Since the beginning of the year, investors in the world’s largest emerging-markets investment vehicle, the $38 billion Oppenheimer developing markets fund, have withdrawn just $400 million — an amount by no means indicative of investor panic.
Still, emerging-market experts say that the fact that the dollar is on a tear and that interest rates in the United States are moving up will entice investors to hunt for juicy returns in the United States as opposed to Brazil and Turkey.
“The U.S. is becoming a high-yielding country,” said Jeffrey Sherman, a bond investor at Doubleline, a mutual fund company based in Los Angeles.
Further cementing the United States’ appeal is rising doubt about senior-level decision making in some of the developing countries.
In Turkey, for example, Mr. Erdogan has been pressuring his central bank, which is nominally independent, to bring interest rates down even though inflation remains high and the lira shaky.
Standard economic theory has it that higher interest rates quell inflation and support the currency.
“This is a vulnerable period,” said Michael Harris, a Turkey specialist at Renaissance Capital in London. “The market assumes that Turkey is one of the big victims of Fed tightening, so we need a spell now when politicians don’t throw more fuel on the fire.”
In Brazil, the Petrobras scandal has added to longstanding fears that the country became too reliant on the commodity boom of the previous decade and gorged on debt.
Now, with Petrobras debt being recently downgraded to junk status, investors fear that a downgrade of the country’s government bonds could follow.
So far this year, the Brazilian real has lost 15 percent and the Turkish lira has lost 12 percent against the dollar, making them the worst-performing currencies among major developing markets.
Brazil and Turkey have taken steps to reassure investors.
Late last year, President Dilma Rousseff of Brazil, under fire for her ties to Petrobras, appointed a new market-friendly finance minister, Joaquim Levy, to oversee Brazil’s cost-cutting drive.
And last week, a weighty delegation of Turkish politicians, headlined by Prime Minister Ahmet Davutoglu and the country’s finance minister, swept into New York to meet with anxious fund managers.
But as long as turmoil and scandal persist, such measures, while helpful, run the risk of being too little too late.
Mr. Tenengauzer, the emerging-market expert, said he had been barraged by phone calls from investors about the chaos in these markets. “It’s really affecting the asset class.”