As the rupiah plunged last week to below 14,800 per US dollar, memories of the 1998 Asian financial crisis came back to haunt the region.
Ongoing crises in Turkey and Argentina have brought other emerging economies into the spotlight and under heavy scrutiny from global investors. These two embattled economies join India, Brazil and Indonesia in what analysts are now calling the “fragile five”.
Currencies of all five have not only suffered contagion from the lira and peso crises, but are also being hit by tightening US monetary policies.
The Argentine peso has suffered the most, depreciating 60 per cent this year. The Turkish lira has meanwhile fallen 40 per cent, the Indian rupee 10 per cent and the Brazilian real 20 per cent. The rupiah depreciated 8.8 per cent, the smallest slide among the fragile five.
Crises hit the ‘fragile five’
Macroeconomic indicators of the five countries offer few clues why investors are pulling their money from these countries. As the depreciations vary in size, it is also not clear which indicator is the culprit for the currency woes.
Their growth in gross domestic product has no direct link to the severity of the currency crises. The Turkish economy has grown 7.4 per cent this year while Brazil’s GDP growth was only 1.6 per cent; yet the Turkish lira has depreciated twice as much as Brazil’s real.
India’s GDP growth hit 8.2 per cent in June, the highest in the world and even surpassing China – yet the rupee has depreciated more than the rupiah.
Fiscal deficits in the fragile five also don’t explain investors’ assessment of the countries’ vulnerability to the crisis. The Turkish deficit was only 1.5 per cent of GDP, the best among the five. Brazil’s deficit hit 7.8 per cent of GDP, the worst, but the Brazilian real depreciation was only half the Turkish lira’s.
Current account deficits often weigh heavily in investor assessment of a country’s risk. A deficit has to be financed externally, so investors look at a country’s ability to service its debt. The fact that Argentina and Turkey are suffering the highest current account deficits among the five (6.3 per cent and 6 per cent of GDP) seems directly linked to their currencies’ depreciation.
Inflation is another factor deciding a country’s vulnerability to economic shock.
Argentina and Turkey have the highest inflation among the five (31 per cent and 14.4 per cent, respectively), with the others all recording less than 5 per cent. Indonesia has 3.1 per cent inflation and a 5.25 per cent interest rate, both the lowest among the five.
Argentina responded to increased inflation by raising its interest rate by 1,500 basis points to 60 per cent, the highest among emerging economies. Turkey used unorthodox policies in responding to the lira’s fall and increased inflation by refusing to hike its interest rate.
Turkish President Recep Erdogan has unnerved foreign investors by resisting calls for interest rate hikes to reign in the rampant inflation. “Interest rate is the mother and father of all evils,” he said.
The Turkish central bank only used trivial means to stem the slide of such as increasing the tax on foreign currency deposits while reducing tax on lira deposit. But these policies seem to have no significant impact.
External debts are another important point for investors weighing a country’s resilience. The higher a country’s external debt, the more exposed it is to changes in its currency’s exchange rate.
Unfortunately, most of the fragile five’s debts are in foreign currencies, primarily the US dollar. Argentina’s debt has hit 57 per cent of GDP, and 70 per cent of that is in foreign currencies. Turkish debts reached 50 per cent of GDP and totals US$453 billion.
Of this, a total $181.8 billion is due to mature within a year from March. But Turkey only has $85 billion in its reserve, less than half of the debt that has to be paid.
Indonesia’s foreign debts totalled $355.7 billion or 34.8 per cent of GDP as of June, according to Bank Indonesia (BI). Of that, only $45 billion is due to mature within a year. But BI currently has $118 billion in its reserve, equivalent to 262 per cent of Indonesia’s short-term debt.
A country’s currency value changes via the interplay of several economic indicators as perceived by investors. The fact that the rupiah depreciated the least among the fragile five currencies reflects investor’s perception of a relatively stronger Indonesian economy.
Many Indonesians are still suffering the after-effects of the 1998 crisis. To ward off a repeat crisis, we need more than the technocratic solution currently being applied
Economics Nobel laureate Paul Krugman wrote: “At such times, the quality of leadership suddenly matters a great deal. You need officials who have enough credibility that the market would give them the benefit of the doubt”.
We are about to see whether President Joko Widodo and his officials can earn this benefit.
Winarno Zain is commissioner for a publicly listed oil and gas service company.