Around the World, Markets are Falling


In stark contrast to the U.S., where a bull market continues, investors are pulling out of developing economies as the economic and financial risks mount.

Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world’s developing economies.

The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions.

Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments.

When we’ve seen this before — in the Mexican peso crisis of 1994, the Thai baht collapse of 1997 and the Russian default of 1998 — investors had to contend with spillover of trouble from one country to others, dragging down economic growth or causing market stress.

So far in 2018, this kind of contagion has been limited.

Economies as varied as Argentina, Russia, South Africa and Turkey are facing the maelstrom, but each has its own reasons for falling out of favor, and the turmoil has yet to raise anxiety about the world’s biggest economies and markets.

Here are the key issues that each is contending with.


Investors were already jumpy because of past crises

One of South America’s largest economies, Argentina spent much of the last two decades locked out of global markets, in the aftermath of its 2001 financial meltdown.

But the 2015 election of President Mauricio Macri was a turning point. He focused on returning the country to the good graces of international investors, by removing restrictions on the flow of capital in and out of the country, and reaching settlements with creditors still owed money since the 2001 collapse.

Argentina was able to regain access to the bond market in April 2016, when it raised $16.5 billion from international investors. Once it did, Argentina repeatedly turned to global investors, tempting them with high bond yields and pledges to gradually bring the country’s spending problems under control.

Then, almost as suddenly as it started, Argentina’s honeymoon with global investors ended this year — for several reasons: A drought hit soy and corn production, which is crucial to the economy. The government showed little progress in reining in deficits. The central bank lowered interest rates even as inflation was rising fast, which was taken as a sign that it wasn’t serious about keeping the peso on solid footing.

Given Argentina’s history — which includes crises in 1980, 1982, 1984, 1987, 1989 and 2001 — investors were not willing to wait to find out.


A strongman took things too far, and big business followed his lead

The Turkish economy enjoyed a ripping run over the much of the last decade. Growth has averaged roughly 6.8 percent since 2010, beating the world economy’s 3.9 percent and other emerging markets, according to I.M.F. data.

But much of that economic pep depended on a debt-fueled bubble. Turkish companies have binged on bonds, much of them denominated in the dollar and the euro.


Global politics are isolating the Russian economy

Russia’s problems with global markets are fairly idiosyncratic.

Since January 2017, the Trump administration has mostly continued the Obama administration’s policy of imposing sanctions on individuals with ties to the country, citing issues such as aggression in Ukraine, interference in American elections, support for Syria’s Assad regime, the poisoning of a former spy and his daughter with a chemical weapon in England, and trade with North Korea.

As global investors factored in the country’s increased isolation from the world economy, the ruble fell 18 percent this year. (Simply put, less integration and trade with Russia mean less demand for rubles, which you need to buy Russian goods.)

Sure, there are some clues for what to look for. Investors are already looking askance at countries that owe a lot of money in foreign currency, for example. Screening for that kind of vulnerability would have identified Turkey as a potential problem spot.

The amount of such hard-currency debt to be paid off, however, is only part of the story. The level of interest rates, the reliance on foreign borrowers, refinancing needs, the size of government deficits and the stockpiles of foreign currency that can be used to push back market pressures all play a role.

Perhaps most important, and most difficult to measure, is a country’s credibility with financial markets. If investors believe a country will continue to pay its bondholders in a currency that retains its value, they will likely put up with even the ugliest-looking levels of debt. If that trust starts to fray, look out below.

2018-09-12 03:45:17

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