As the dollar’s strength roils developing markets, the good news is that many are now well prepared with piles of reserves for just such a scenario.
More than a dozen emerging-market currencies have tumbled versus the greenback this month, as the Federal Reserve looks poised to keep interest rates higher for longer. The slide has ramifications for the rate path of central banks as well as governments that have to service debt issued in major currencies such as the dollar. About $54 billion in emerging-market hard-currency notes come due in 2024, data compiled by Bloomberg show.
While the slump rekindles memories of past crises, such as Thailand’s in 1997, many countries are in a far better position now, with ample reserves, floating exchange rates and solid growth. Still, the cases of Egypt or Sri Lanka illustrate what can go wrong when currencies tumble and reserves dwindle.
The following charts illustrate the state of play:
“Things are obviously very different from the late 1990s,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings Inc. Even so, “the pressure most EMs are facing is there. From central banks’ perspective, the main focus is to keep volatility low.”
Weakening exchange rates and market gyrations have triggered a flurry of official responses in recent days. South Korean officials have voiced concerns about the sharp decline in the won, which US Treasury Secretary Janet Yellen took note of at a meeting in Washington.
Indonesia’s central bank intervened this week after the rupiah hit a four-year low.
“There can be circumstances where exchange-rate volatility is excessive, where some FX intervention could be appropriate, but it really depends on the particular circumstances,” Tobias Adrian, director of the International Monetary Fund’s monetary and capital-markets department, said at a briefing in Washington this week.
Sri Lanka’s 2022 economic crisis and sovereign default was precipitated by a lack of reserves to pay for imports of fuel and other essentials. Pakistan faced a similar predicament in 2023. But overall, many Asian countries have an ample stockpile of foreign currency. The IMF’s rule of thumb is that countries have “adequate” buffers hen they hold enough money to cover three months of imports.
Persistently spending more on goods and services abroad than is flowing in can undermine a country’s fiscal standing, especially if investors start to yank funds abruptly. While countries such as China and South Korea run trade surpluses, others like Brazil are in deficit.
The pandemic saddled economies around the world with more debt, and the ensuing push by the Fed and other central banks to hike rates to quash inflation raised the cost of paying for the pile of borrowings. Several governments in Asia have pledged to reduce debt even as they launch fiscal programs, such as Indonesia’s free- lunch program, as they project higher revenue and trim other parts of their budgets.
According to Institute of International Finance data, the debt burden of frontier markets has swelled to some $3.5 trillion.
The prospect that the Fed will keep rates elevated for months to come could also sway Latin American policymakers, who were the first across the globe to embark on interest-rate cuts.
Some investors say Colombia’s central bank, whose benchmark interest rate is 12.25%, may refrain from accelerating the pace of easing. In Brazil, meanwhile, traders are pricing in a smaller cycle of rate reductions.
Citigroup Inc. analysts including Ivan Riveros said Brazil’s central bank may have to deliver a smaller rate cut than what it had signaled as forward guidance for the May meeting.
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