Towards the end of January this year, there were major rumblings about the potential for an emerging market crisis.
Money was being withdrawn from emerging market funds at an alarming rate and the investment world was buzzing with talk about serious trouble brewing in the “Fragile Five”.
These were the emerging markets of Brazil, Turkey, Indonesia, India and South Africa that all faced the unhealthy mix of rising inflation, weakening growth and current account deficits. Morgan Stanley first coined the term last year, identifying these five markets as the most vulnerable to the US Federal Reserve’s tapering of its monetary stimulus policy.
The fear was that as a cheap supply of money dried up and US Treasury Bond yields rose, investors would become more discerning about where they looked for returns. The expectation was that they would pull out of these markets in favour of less risky destinations.
And for a moment, this seemed to be exactly what was happening. In November, December and January, emerging markets experienced record foreign capital outflows.
South Africa was caught in the midst of it as the Fragile Five bore the brunt of these withdrawals. There was even talk of a perfect storm that could spread to all emerging markets as the lack of confidence took hold.
All five of the Fragile Five’s currencies fell at least 13% against the dollar in 2013, led by a 21% decline in the value of the Indonesian rupiah. Political problems in Turkey and pending elections in India, Indonesia, South Africa and Brazil also added to concerns as there has been a pattern in the past of emerging market crises hitting after elections.
However, thanks to a combination of factors the worst never happened.
For a start, a sustained increase in US Treasury Bond yields didn’t materialise. In fact, yields have come down.
And, secondly, central banks in many emerging markets took some pretty strong action. On 28 January the Turkish Central Bank raised its overnight lending rate by 425 basis points from 7.75% to 12.0% at an emergency late night meeting. India also increased its key rate, while Brazil’s central bank had been raising rates for six straight meetings.
The South African Reserve Bank joined the trend too, lifting the repo rate from 5.0% to 5.5% just a day after Turkey’s hike. In Indonesia, the interest rate was raised from 5.75% to 7.5%.
This combined action stabilised these currencies and brought some composure back to the market. And what followed, was not just a moderation of outflows, but a substantial return of foreign investment.
Since February, South Africa has seen nearly R60 billion in foreign capital capital coming in to bond and equity portfolios. This is a record for any four month period.
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