Newspaper article International New York Times

Emerging Markets Lose Their Luster ; Investors Turn Nervous over Economic Turmoil and Political Scandals

Newspaper article International New York Times

Emerging Markets Lose Their Luster ; Investors Turn Nervous over Economic Turmoil and Political Scandals

Article excerpt

Emerging markets have lately taken on a more toxic quality, with messy politics and staggering economies prompting some investors to reassess their portfolios.

In Russia, it is assassinations and war. In Brazil, a corruption scandal may derail the economy. And in Turkey, the president is attacking the country's senior central banker.

Emerging markets, not long ago seen as a necessary ingredient for the common portfolio, have lately taken on a more toxic quality as messy politics and staggering economies are prompting some investors to reassess their investment rationale.

Compounding these concerns has been the dollar's upward march and the growing acceptance that the Federal Reserve will soon increase interest rates as the United States economy outpaces the rest of the world's.

Emerging-market currencies, an accurate barometer of investor mood swings, are now suffering the consequences. The Turkish lira and the Brazilian real have touched multiyear lows against the dollar while the Russian ruble remains volatile after its 65 percent plunge.

Even the currencies of economies seen to be in better shape, like the Mexican peso, which is trading at record lows against the dollar, and the Indian rupee are under pressure.

"You are seeing all the bad things about emerging markets that originally made them subinvestment grade," said Daniel Tenengauzer, an emerging- market specialist at the Royal Bank of Canada. "The whole thesis that emerging markets are emerging is being questioned right now."

Mr. Tenengauzer points to Brazil as the main culprit. Allegations of kickbacks and bribes at Petrobras, the country's energy giant, threaten to engulf the country's business and economic elites.

Petrobras, which has relied on global bond markets to finance its ambitious investment plans, is now retrenching -- a bad omen for Brazil's investment-starved economy, which is not expect to grow this year.

But the outlook is no better in Russia, where a war with Ukraine and President Vladimir V. Putin's erratic ways -- combined with a collapse in the price of oil -- have rattled investors. And in Turkey, the country's president, Recep Tayyip Erdogan, has added to existing currency jitters by suggesting that the head of the Turkish central bank is beholden to foreign speculators because he has not lowered interest rates fast enough.

Beyond these surface problems are deeper vulnerabilities in these and other emerging markets that analysts say will become more acute as the dollar continues to race ahead.

In a report published last week, Mr. Tenengauzer highlighted how, in the last five years of extraordinary central bank easing of monetary policy, emerging markets have taken on more debt as developed markets have done the opposite.

This dollar-based leveraging up has been led by capital-hungry companies that cashed in on a broad investor desire for high- yielding bonds. Chinese short-term debt has exploded to $850 billion from $101 billion since 2008; in Brazil, the increase was to $112 billion from $47 billion, and Turkey's near-term liabilities jumped to $95 billion from $56 billion.

When their currencies were strong and the dollar weak, such a strategy made sense. But when the reverse is true, foreign investors take their money elsewhere, and these dollar debts become harder to pay off.

Of course, it is a mistake to treat emerging-market problems as uniform. …

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