The recent fierce selloff of many emerging economies currencies has now abated somewhat, but the crisis is not over by a long way.
The expected withdrawal of US monetary stimulus has prompted investors to pull out of countries seen as riskier because they have budget deficits, slowing economies and high inflation.
At the epicentre of the turmoil is India.
Share prices there suffered three consecutive months of decline through to August as foreign cash was withdrawn amid dismal economic growth.
Its currency – the rupee – remained frail after last week slipping to an all-time low against the dollar.
The currency sell off has led some members of the so-called BRICS bloc, that is Brazil, Russia, India, China and South Africa, to suggest a coordinated intervention in the foreign exchange markets, though Brazil said it would not join in with that., and Moscow was silent on the matter.
To get more more insight, euronews spoke to Jean-Pierre Petit, head of independent investment strategy firm ‘Cahiers verts de l‘économie’.
Antoine Juillard, euronews: “The US Federal Reserve’s likely change in stimulus policy is being seen as the catalyst for this, with the background being the fundamental weakness of those economies. How exactly are they weak?”
Jean-Pierre Petit “These countries have big deficits, partly because they have problems with competitiveness. One reason for that is that over the last three or four years these countries have not been making many structural reforms – which they did do in the previous decade. They have supply bottlenecks [they cannot make enough goods to meet demand] – especially India and Brazil – and that issue really has to be addressed if they are to convince international investors that the measures they are taking are credible and sustainable.
“How has the Federal Reserve’s decision played a role? Well, there are effects when the Federal Reserve announces changes in its monetary policy – and you mustn’t forget that the US is the biggest global investor.
“When the investors there see that interest rates (the return on government bonds) are becoming better in the United States, then the capital (investment money) that has been flooding into emerging economies in the last five years gets repatriated to the United States.
“During that time very large amounts of money have poured into the bond markets, debt markets, the (higher) interest rate markets.
“So the countries that have seen their deficits widen – including India, – or where the deficits has stayed very significant (big) such as Turkey, South Africa and some eastern European countries – such as Ukraine – they are in trouble.”
euronews: “Could a crisis that goes on for some time in these countries cause damage to the eurozone?”
Petit: “It is obvious that if there is a big impact on emerging economies, or at least a number of them, including the most important ones – I wouldn’t include China as it has greater financial autonomy and much more flexibility, especially in terms of foreign exchange reserves, and it does not have a current account deficit – there will be a negative impact in the end.
“However in general I don’t believe that all emerging markets will suffer a massive shock that is likely to lower global demand as happened in 1997-1998.” (the last significant crisis involving emerging economies)
euronews: “Some of the BRICS want an agreement on an intervention fund for the foreign exchange markets. In the short term, is that the right action to take?
Petit: “In the current situation, it’s not a good response. The best thing for those most vulnerable countries to do right now is to address the causes of the deficits, the causes of their problems, including structural issues, and – particularly in India – a lack of governance.
“India is a country that has not carried out structural reforms and which has a very fragile political situation, which is 95th in the world in the Corruption Perceptions Index, which cannot do anything because of political gridlock.
“That’s the problem, not setting up an intervention fund.
“So there has to be urgent action, and right now there’s no sign of that. A number of countries – I think the countries that are most in difficulty – should take steps to convince the international community of the willingness of those governments to sort out the imbalances that are causing these problems.”