Thursday, September 12, 2013

The Rupee & Rupiah Plummet – Just A Taste Of What’s To Come?

 11 SEPTEMBER 2013
The Rupee & Rupiah Plummet – Just A Taste Of What’s To Come?
By Andre Lee

Over the past few years, emerging markets have seen huge capital inflows on the back of excess liquidity in developed markets.  The era of ‘cheap money’ was precipitated by unprecedented quantitative easing programs in the United States.

However, emerging markets have witnessed their currencies take a beating ever since Ben Bernanke said on May 22 that the Federal Reserve might begin to taper its US$85 billion monthly bond purchases if the economy picks up.  Investors have begun to relocate capital to safer havens as the yields offered by emerging markets become less attractive in an environment with higher interest rates.

The infographics below depict the plight of two of the worst performing Asian currencies in the year to date-the rupiah and the rupee.  Read on to get a grasp of the problems in these two economies and what their governments have done so far to stabilise their currencies.

We next take a look at the rupiah, which is South East Asia’s worst performing currency of 2013.
We have about more than a week to go before the Federal Open Market Committee meeting where US policymakers will decide whether or not to taper the stimulus program. It will be interesting to find out if the effect of tapering has been fully priced in by currency markets, or if there will be more carnage to come should the Fed really taper. Your guess is as good as mine.

One cannot help but to draw parallels between the current situation that emerging market currencies are facing and the Asian Financial Crisis (AFC) in 1997. Back then in 1997, many developing countries in Asia such as Thailand and South Korea ran high interest rates and were attracting huge capital inflows and experienced a run-up in asset prices. Their large current account deficits were funded by hot money. Once Alan Greenspan raised interest rates to counter inflation in the US, capital began flowing back to the US and many Asian currencies fell drastically.

The above mechanism sounds similar to what we are facing now, doesn’t it? It is perhaps unlikely that we will ever face something of the same magnitude as the AFC. Policymakers have learnt (we all hope so) from past lessons and put in place stricter controls on current account deficits and have more flexibility in controlling their currencies. In the meantime, the governments of emerging markets have to get their act together and arrive at the most prudent policies to tackle the immediate problems that they are facing.

Publish date: 11/09/13

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