For many emerging economies, 2014 has gotten off to a grim start. Concern over the Chinese economy's marked slowdown and the Argentine peso's steep slide against the U.S. dollar has triggered heavy selling pressure on an array of emerging-market currencies. But the current volatility does not portend sustained weaker growth in emerging economies as a whole. Differentiation is needed, and that is what financial markets are now doing.
The scale of the battering varies widely from country to country. For example, the problems currently dogging
By contrast, the currencies of central and eastern
The stabilization of the eurozone economy and the reduction of imbalances have helped to improve the growth outlook for central and eastern European countries. Furthermore, most of these countries have made progress taming their own imbalances. By contrast, the Russian ruble has continued its lengthy nose dive this year, tumbling by more than 5.5 percent against the euro by the beginning of February. The reasons are mainly homegrown: a poor investment climate, heavy capital outflows and a shriveling current-account surplus.
A look at
The region's reliance on commodities is fraying nerves. If Chinese economic growth turns out to be weaker than expected, commodity prices and exports are likely to fall, undermining Latin American countries' growth. However, with global industrial-production indicators climbing since the second half of 2013, pointing especially to improvements in the advanced economies, gloomy forecasts for commodity markets seem off the mark.
So far, Asian currency losses have been limited. The South Korean won has experienced the largest slide, with a loss of 3 percent from the start of the year to the beginning of February (though this comes in the wake of a protracted upward trend). The Indian and Indonesian currencies have been weathering the storm quite well, but both fell steeply last year. The Indian rupee, burdened by a chronic current-account deficit, stubbornly high inflation and a sharp slowdown in growth, lost 11 percent year on year by the end of 2013.
Evidently, the markets think the authorities are up to the task.
The financial markets are evidently punishing the currencies of countries that, due to macroeconomic imbalances or political instability, are susceptible to external shocks of any kind. Indeed, some players fear that the spiral of depreciation, higher inflation and rising interest rates could broaden out into a full-scale crisis of confidence.
But, while the further withdrawal of capital cannot be ruled out, not all investors swim with the tide. With prices in the affected countries at a much more favorable level, confidence-building policy measures could quickly encourage forward-looking investors to test the water.
Broadly speaking, devaluations can help boost competitiveness and reduce external deficits. But in the short term, they can exacerbate economic problems by inciting higher wage demands, fueling inflationary pressure and boosting external-financing costs.
In these circumstances, monetary policy must perform a balancing act. In order to counter a devaluation-fueled rise in domestic inflation, the central bank needs to raise key interest rates – but without throttling the economy. Policymakers are more likely to succeed to the extent that domestic reforms address macroeconomic imbalances and other obstacles to long-term growth.
Most Popular Stories
- Obama Administration Releases Proposal to Regulate For-Profit Colleges
- Apple, HP, Intel May Take a Hit from Slowdown in Smartphone Sales Growth
- Elizabeth Vargas' Husband Marc Cohn Addresses Rumors
- Keurig Adds Peet's coffee, Alters Starbucks deal
- U.S. to Relinquish Gov't Control Over Internet
- Motley Crue's Nikki Sixx Marries Model Courtney Bingham
- FDIC Files Lawsuit on Behalf of Banks Allegedly Hurt by Libor Scandal
- Chinese e-Commerce Giant Alibaba Gears for IPO in U.S.
- Quiznos Files for Chapter 11
- Some California Cities Seeking Water Independence