Advertisement

SKIP ADVERTISEMENT

Investors Still Wary of Efforts to Shore Up Currencies

A woman counts dollars and Turkish lira in a currency exchange office in Istanbul.Credit...Emrah Gurel/Associated Press

Jack Ewing and

FRANKFURT — Emergency measures by Turkey and South Africa to stop a headlong flight of foreign investors had little effect on Wednesday. The financial markets all but ignored increases in official interest rates aimed at strengthening the countries’ currencies.

Russia’s ruble was also affected by the currency plunge in emerging markets, while the Argentine peso continued its plummet.

Major indexes in Europe slipped Wednesday, with modest declines of less than 1 percent. American markets opened lower and then dropped lower in the afternoon after the Federal Reserve announced it would continue to scale back its bond-buying program.

The Turkish lira initially rose Wednesday morning after the country’s central bank announced overnight that it was increasing the rate for one-week loans to banks to 10 percent, more than doubling the rate from its previous level of 4.5 percent. The move was an attempt to slow inflation, restore the central bank’s reputation, and increase demand for lira by offering investors a better return.

But Turkey’s move did not seem to calm investors on Wednesday, and appeared to risk causing collateral damage to the rest of its economy.

By afternoon, the Turkish currency had given up the gains and at one point fell close to its low of 43 cents — the price in dollars to purchase one lira. The higher rates also threatened to stifle economic growth by substantially raising the cost of borrowing money.

“The central bank is doing whatever it can to control the fluctuation; however, the Turkish economy is not strong enough to absorb any global instability,” said Oya Karaca, manager at Tolga Currency Exchange in Istanbul. The weakness of the lira “reflects on all aspects of daily life and is not good for people,” he said.

Similar but much subtler action by the South African central bank, which on Wednesday increased its benchmark interest rate to 5.5. percent from 5 percent, also failed to prevent a decline in the country’s currency. Some analysts said the rate increase in South Africa was intended more to control inflation than to underpin its currency, the rand, which fell 1.7 percent against the dollar Wednesday to a level close to a five-year low.

In a statement on Wednesday, Gill Marcus, governor of the South African Reserve Bank, summed up the forces buffeting developing countries. In addition to depreciating currencies and capital flight, she said, growth is slowing and inflation is rising. Countries suffer from trade deficits and budget deficits, as well as sinking confidence. “We are now entering a phase of the crisis that is creating new challenges for emerging market economies,” Ms. Marcus said.

The Russian ruble was also hurt by a broad plunge in the value of currencies of emerging markets. The ruble fell 1 percent against the dollar, to its lowest point since February 2009. Investors were particularly harsh on countries that they regard as poorly governed, including Russia and Argentina, and countries that have been rocked by public protests, like Ukraine and Thailand.

Anshu Jain, co-chief executive of Deutsche Bank, the world’s largest currency trader, said Wednesday that markets were likely to remain unsettled for some time, but that the effects were manageable.

“No doubt there has been a great deal of volatility during the last quarter,” Mr. Jain said at a news conference in Frankfurt. “Our own situation is very orderly.”

But some analysts warned that declines in emerging market currencies could affect the United States, Europe and Japan. Developing countries, until recently the engines of global growth, will not have the same purchasing power and may buy fewer exports, said Julian Callow, an economist at Barclays.

“The direct effects of the recent emerging market foreign exchange turbulence, if contained, are not likely to prove substantial” for growth in the United States, Europe and Japan, Mr. Callow said in a note to clients. “However, at the same time, the implications are not negligible either, especially for the euro area,” he said, because of Europe’s greater dependence on exports to developing countries.

The quandary that policy makers in emerging markets face is that they cannot raise interest rates without endangering economic growth. The policy moves are not convincing, because currency investors do not believe the central banks will be able to keep rates high for long, said Klaus Bauknecht, an analyst at IKB Deutsche Industriebank in Düsseldorf.

“I can’t think of one case in emerging markets where a hike in interest rates has succeeded,” Mr. Bauknecht said. During previous crises in Asian countries and Russia, he said, “Everyone knew those rates were not credible because they would kill the economy, and will have to loosen.”

The flight of foreign capital, which is a primary reason for the currency declines, is a result of investors’ putting money back into developed countries as their economies improve — and as the United States central bank pulls back on its stimulus. The Fed’s moves are expected to eventually raise market interest rates in the United States and other Western economies.

Global investors are anticipating better returns on their money in the United States and Europe, which are seen as less risky than places like Russia. And investors are singling out countries like Turkey that are perceived to be economically weak and politically tumultuous.

Analysts said Turkey provided a study in what happens when a central bank squanders its credibility. The rate increase by the Central Bank of the Republic of Turkey was much bigger than analysts had expected. But investors said they continued to believe that the bank is subject to meddling by Prime Minister Recep Tayyip Erdogan, who has been outspoken in his opposition to higher interest rates.

While technocrats at the central bank “were able to win the argument this time around,” Naz Masraff, an analyst at the political consultancy Eurasia Group, said in a note to clients, “the future course of currency and monetary policy remains uncertain.”

With Turkey already ensnarled by a political crisis, the plunge in its currency has raised the price of imported goods like food and oil, and helped push inflation to 7.4 percent, according to official figures. Many businesses are already feeling the pain.

“We’ve been in crisis for the last two years, but the political crisis in December came as the final blow,” said Nilgun Aksa, owner of Smile Advertisement Company, a television production house in Istanbul. She was referring to an extensive graft probe against the government, which led Mr. Erdogan to conduct a purge of the judiciary and the police force. Firing so many people in the legal system was seen as a government effort to derail the corruption investigation and was part of what some say is Mr. Erdogan’s steady creep toward authoritarianism.

“We have been sitting empty-handed at the office for months now, when we should be shooting an average of 40 commercials in a month,” Ms. Aksa said. She has had to lay off 12 of her 14 employees, and said she expected the situation to get worse.

Mr. Bauknecht, the analyst in Düsseldorf, said he thought the decline in the Turkish lira was out of line with the country’s economic fundamentals and that the currency would recover. But it could take months or a year for the rebound to come, he said.

“The markets will continue to be nervous,” he said, “until there is some stabilization of the internal situation.”

Advertisement

SKIP ADVERTISEMENT