A basket of emerging market currencies was sold off this week fuelling speculation that the Turkish Lira's losses could be spreading to other economies. Emerging market currencies such as the South African Rand, Argentinian Peso and the Indian Rupee all saw significant declines this week. Not escaping the ripples from the fallout, stock markets and commodity prices have also been devalued.
Experts are now concerned that emerging market economies that had enjoyed an era of cheap cash to fuel development, infrastructure projects and investment will also now begin to feel the effects.
Whilst many of the issues surrounding Turkey's financial downfall can be related to policy and the nation's souring relationship with the U.S., economists remain concerned that this could be the first of many emerging market economies at risk.
The South African Rand
The Turkish Lira slide has taken its toll notably on the South African Rand, which has tumbled to a 24-month low against the dollar. While much of the decline has been due to a lack of appetite for emerging market currencies caused by the Lira's downfall. The USD/ZAR has been elevated further due to a downbeat appraisal by the Moody's. Moody's concluding that the pace of nations fiscal consolidation will be slower than the government has anticipated.
The rating agency also predicted that the ever-increasing public sector wage bill and weaker than expected economic growth could provide further challenges for South Africa. The ZAR losses were further accentuated as the biggest company on the Johannesburg stock exchange, Naspers, stock price fell. The company which accounts for 18 percent of the index tumbled after Tencent Holdings Ltd TCEHY a sister company reported its latest earning which missed the target. The move prompting the largest fall since May.
Over the last 3-month, USD/ZAR has enjoyed aggressive gains touching a high of 14.9806, the highest level since August 2016. Currently, the pair sits at 14.6558, with the Rand's issues far from solved.
The Indian Rupee
Another currency which has touched significant lows against the dollar is the Indian rupee, which is now trading between 69-70 against the USD, a historic high
India's trade deficit has also widened to five-year high. The trade deficit has been exacerbated by an increase in oil imports.
These factors have led investors running to the security of the dollar. Recently, the USD/INR rocketed above 70.00, touching all-time highs of 70.670.
The INR likely has room to drop further despite intervention from the Reserve Bank of India. Increasing oil prices, an exodus of investors from emerging markets and the likelihood of further U.S. interest rate rises will all contribute to losses for the Rupee.
Argentina Requests IMF bailout
The Argentine Peso, similar to the Rupee, has hit all-time lows against the USD at 30.375. The ARS struggling to find support despite a multitude of interest rate rises earlier this year. In June, the Argentine Central Bank agreed to a deal with the International Monetary Fund. The 3-year deal will allow Argentina access to a $50 billion safety net.
Argentina, which shunned support from the IMF for many years, will now seek to reduce its fiscal deficit. The government expects to see lower growth and higher inflation, which has led to protests. Argentina now aims to reduce its fiscal deficit to 1.3 percent of their GDP, down from 2.2%, their Treasury Minister Nichola Dujovne said.
The IMF has yet to ratify the deal. However, Managing Director Christine Lagarde said, "This measure will ultimately lessen the governments financing needs, put public debt on a downward trajectory, and as President Macri has stated, relieve a burden from Argentina's back."
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