Emerging markets’ currencies are under threat as the dollar soars

Emerging market currencies across the globe have taken a beating in recent days as the US dollar continues to strengthen, prompting analysts to question the investment attractiveness of developing countries

Corruption scandals, political tensions, domestic fiscal woes and now expectations of an interest rate hike in the US are making investments in emerging markets a less attractive option.

In South Africa the rand fell sharply against the dollar yesterday breeching the R12/$ mark and sparking concerns that the weak rand could soon dip to record lows last seen in 2001.

“We are seeing the largest weaknesses in some of the familiar emerging markets like South Africa, Turkey and Brazil. Politics seems to be playing a role,” Capital Economics senior emerging markets economist William Jackson told Moneyweb.

According to The New York Times, foreign direct investment into emerging markets has slowed since the start of the year, and statistics from the Institute of International Finance reveal that global capital flows into emerging economies last month almost halved from $23 billion to $12 billion with money flowing out of Brazil, the Ukraine and Thailand into Indonesia and India.

“You are seeing all the bad things about emerging markets that originally made them sub-investment grade. The whole thesis that emerging markets are emerging is being questioned right now,” Royal Bank of Canada emerging market specialist Daniel Tenengauzer told the New York Times.

With interest rates set to rise in the US soon, emerging markets experts say investors will likely be lured into investing in the world’s biggest economy where the possibility of lucrative returns are infinitely better than emerging economies like Turkey and Brazil.

While falling global oil prices have to some extent cushioned South African consumers from some of the effects of the weak rand, the slump in commodity prices has hurt the country’s economic growth.

“When commodities prices fall, it’s not easy to be confident about emerging markets,” says Citi Research head of emerging markets economics David Lubin in a Financial Times report.

“Emerging markets is a commodities exporting asset class and portfolio flows are discouraged as risk appetite falls.”

Source: New York Times, Financial Times, Moneyweb