Emerging-Market Rout Expected to Endure

Currency selloff projected to continue as interest rates remain low; some fear it may spill over into currencies with stronger fundamentals, including the Mexican peso.

Inflation-adjusted interest rates are still too low in developing nations for Citigroup Inc. and Goldman Sachs Group Inc. to foresee an end to the worst emerging-market currency selloff in five years.

One-year borrowing costs in Turkey are 3.6 percent, less than half of the average in the three years before the 2008 global financial crisis, even after the central bank doubled its benchmark rate last week, according to data compiled by Bloomberg. The real yield for Mexico is almost zero, while South Africa’s is 1.4 percent, compared with an average of 2 percent over the past decade.

The interest-rate increases are a reversal of the trend over the past five years, when the Fed’s monetary stimulus boosted investment around the world and allowed central banks in developing countries to cut borrowing costs. Cheap money encouraged consumption, widening trade deficits and fueling inflation.

Turkey’s shortfall in the current account, the broadest measure of trade and services, amounts to more than 7 percent of its gross domestic product, making the nation more reliant on foreign capital. Brazil’s consumer prices stayed above the central bank’s target since August 2010, eroding the competitiveness of the economy.

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