News ID: 231074
Published: 0717 GMT September 09, 2018

Argentina, Turkey, Mexico ... fear of contagion haunts emerging markets

Argentina, Turkey, Mexico ... fear of contagion haunts emerging markets
MUJAHID SAFODIEN/AFP/GETTY IMAGES

In the past six months, some of the world’s fastest-growing economies have found themselves flat on the floor, gasping for breath and, in one case, seeking help from the global financial rescue center otherwise known as the International Monetary Fund.

Argentina’s $50 billion bailout by the Washington-based lender of last resort is the most extreme event so far, but it sits alongside the dramatic collapse of the Turkish lira, a recession in South Africa and dire economic predictions for the Philippines, Indonesia and Mexico, The Guardian reported.

Making matters worse, the US is poised to slap tariffs as high as 25 percent on as much as $200 billion worth of Chinese goods. If the US goes ahead, Beijing has already threatened to retaliate, which would only incense President Donald Trump further. This tit-for-tat might only end when tariffs are applied to the entire $500 billion of Chinese goods imported by America each year.

In response, the stock markets of many developing nations have slumped in value, leaving investors to ask themselves whether they are witnessing an emerging-markets meltdown akin to the Asian crisis of 1997: a panic that wrecked the finances of several hedge funds and proved to be an hors d’oeuvre before the dotcom crash of 1999 and the global financial crisis of 2008.

Investors have run for safety to such an extent that the MSCI Emerging Markets index, which measures the value of shares in emerging economies, has tumbled by more than 20 percent since the beginning of the year.

That slump appeared to be over in July, when Turkey and Argentina were seen as being isolated, and more importantly ringfenced, economic trouble spots. But figures last week showing that the US economy is steaming along like a runaway train — underlining the likelihood of more US interest rate rises — have sent the currencies and stock markets of most emerging-market economies tumbling again.

Lukman Otunuga, research analyst at currency dealer FXTM, said that a sense of doom is lingering in the financial markets as fears of contagion from the “brutal emerging-market sell-off” rattle investor confidence.

“More pain seems to be ahead for emerging markets as the combination of global trade tensions, prospects of higher US interest rates and overall market uncertainty haunt investor attraction,” he said.

The closely watched ISM survey of US manufacturing showed the sector was just a few points away from reaching its all-time high, recorded in 1983. That puts factory output at bursting point, with car firms and the aerospace industry working around the clock to satisfy demand at home and abroad.

In the second quarter of the year, the US economy was running at an annualized growth rate of 4.1 percent — much higher than the UK and eurozone, which are expanding at a sluggish 1.5 percent by comparison.

Analysts are convinced these figures, coupled with low unemployment, will persuade the US central bank, the Federal Reserve, to keep raising interest rates this year and into 2019. Federal Reserve chair Jerome Powell said as much last month in a speech to his international counterparts at the annual Jackson Hole central bankers’ meeting in Wyoming.

Alarmingly, he praised Alan Greenspan, who ran the Fed in the 1990s and early 2000s, for spending the latter part of his tenure steadily increasing rates to choke off a boom. It was an unfortunate analogy to draw, given that Greenspan is now known for keeping rates too low and allowing first the dotcom bubble and then the bank lending boom, only raising rates when it was too late.

   
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