Emerging Market Crises:1998 Vs.2014
December 17, 2014 Leave a comment
Oil prices were tanking. Emerging market currencies were in a freefall.Venezuela was mired in a financial crisis and Russia had sunk into debt default and devaluation. The year was 1998.Emerging markets today, look a lot like they did back then. Here’s a look at the similarities and differences between now and then.
Falling Oil Prices
Crude has dropped 48% since June to about $55 a barrel, squeezing exporters from Venezuela to Russia and Nigeria.Credit default swaps show a 97% probability Venezuela will default on bonds within five years, according to data compiled by Bloomberg. The Russian economy , which is under sanctions by the US and the European Union over the Ukraine conflict, will contract as much as 4.7% next year if oil remains at $60.
A Bloomberg index tracking 20 of the most traded emerging-market currencies fell to the lowest since 2003 on December 15. The ruble tumbled past 64 per dollar for the first time, Turkey’s lira fell to an all-time low while Indonesia’s rupiah retreated to levels last seen in 1998.During the Asian financial crisis in 1997 and 1998, countries from Thailand to Malaysia capitulated on defending their currency pegs, leading the Thai baht to lose half its value in six months.
The US Federal Reserve is laying the ground for its first interest rate increase since 2006, threatening to drain capital from developing nations. The World Bank estimated last year that private capital inflows to developing nations could drop 50% should long-term US bond yields rise one percentage point. Countries with large current account deficits, including Turkey, South Africa and Brazil, are vulnerable, according to Credit Agricole CIB. A series of Fed rate increases in the mid-1990s helped trigger the run on Asian currencies that would in turn lead to Russia’s default.
Flexible Exchange Rates
Developing countries have allowed their exchange rates to fluctuate, moving away from the fixed exchange-rate regimes prevailing during the crisis in the late 1990s. While weaker currencies fuel inflation, they can also stimulate economic growth by making exports cheaper.
Developing countries’ foreign reserves dwarf the amount they had in the late 1990s, which will help them weather the volatility in financial markets. As a group, emerging markets hold $8.1 trillion, compared with $659 billion in 1999, according to data compiled by the Inter national Monetary Fund.
While rates are rising in some developing nations, they remain a fraction of the levels seen in 1998. Russia raised its benchmark rate 6.5 percentage points to 17% effective December 16 at a late-night meeting. Some short-term rates soared over 100% back in 1998. In Brazil, policy makers have raised benchmark rates to 11.75%. That’s still less than half the rate levels from 1998.