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http://www.ft.com/cm…l#ixzz2WqnxHnE7 Last updated: June 20, 2013 6:36 pm Emerging markets suffer the advent of the taper By Robin Wigglesworth, Amy Kazmin and James Crabtree Back in late 2010, as the US was embarking on its second round of monetary easing and emerging economies were struggling to cope with the hot inflows that came hand in hand with it, Brazilian finance minister Guido Mantega coined the phrase “currency wars”. He was complaining about countries like the US possibly using quantitative easing to devalue their currencies and boost growth following the crippling financial crisis. Three years on, as the US Federal Reserve provides clarity over its plan to start slowing QE3, those currencies appear to be in full retreat. India’s rupee and the Turkish lira bore the brunt of the emerging market rout on Thursday, both hitting record lows, after Fed Chairman Ben Bernanke said the central bank would probably start reducing its $85bn-a-month asset purchases this year, and end it in 2014. The rupee’s precipitous slide prompted the Reserve Bank of India to intervene to stop the currency from breaching Rs60, the psychologically important threshold, according to currency traders. The RBI declined to comment. Despite Mr Mantega’s complaints of currency wars, many developing countries benefited from western central bank-supplied money seeping into their healthier and less indebted economies, as investment in companies, infrastructure and their capital markets aided growth. But analysts fret that some states could suffer as that flow of money starts to reverse. “It’s a shot across the bow,” said David Jacob, vice-chairman of Henderson Global Investors. “Emerging markets are vulnerable. A huge amount of money has flowed there.” The prospect of less easy monetary policy in the US comes at an awkward time for many developing countries. Economic growth is already slowing, and a combined current account surplus of almost 5 per cent before the financial crisis has now shrunk to just 1 per cent, according to the International Monetary Fund. Countries with current account deficits – such as India and Turkey – are seen as particularly vulnerable to outflows, and it was their currencies that were hurt the most on Thursday. These economies import more than they export, and need foreign capital to plug the gap. Of the 25 largest emerging market currencies, only the Indonesian rupiah managed to hold its ground against the US dollar. Indians’ hunger for gold has fuelled its record current account deficit of 6.7 per cent of economic output. Finance minister P. Chidambaram has made an impassioned appeal to Indians to stop buying gold. “If we can have minimal gold imports for six months or one year, it would dramatically change the current account deficit, and you would see the impact on every other index that measures the economy.” The crucial issue for emerging markets is whether market turbulence persists and exacerbates this economic slowdown by pushing up borrowing costs for their governments, companies and households. Brazil and Ukraine are vulnerable, while better performing economies like the Philippines and Mexico are also facing higher borrowing costs as international investors edge out of their markets. Many investors are confident that the impact could be limited, highlighting the structural, financial and economic progress made since the developing world was plagued by crises in the 1980s and 1990s. Budgets and debt levels remain far healthier than in the west. The Fed’s tapering of QE3 is also expected to be gradual and interest rates kept on hold until 2015. The IMF forecasts that emerging economies will grow 6 per cent a year between 2013 and 2018. If the Fed does begin to taper its asset purchases, that will be on the back of a stronger US economy, which should help global growth, analysts said. Emerging markets also rely less on foreign investors and overseas debts than in the past, with many having shifted to local bond markets in the wake of past crises. Bryan Pascoe, global head of debt capital markets at HSBC, said that emerging markets are “in much better shape to weather storms these days.” Continue reading →