Economists fear that a new global crisis may come. As in 1997, this crisis will start in developing markets. Argentina and Turkey are at risk of being the first victims of the new economic turmoil.
Premises of a global crisis
In recent months, currencies in almost all developing countries have experienced some kind of pressure from a combination of factors, such as increasing US bond yields and strengthening of the dollar, Marsel Salikhov told the Russian website RBC. For him, this combination of factors diminishes the attractiveness of assets in many developing countries to international investors.
The first sign that the boom in developing markets would finally come to an end was at the end of 2016 when the US Federal Reserve had raised its interest rates. As a result, countries with large account deficits were in a risk zone.
“It is no surprise that the first to become victims were weak players in the team of developing markets like Argentina and Turkey,” he said.
Inflation is out of control at the Central Bank of Argentina, unexpected tax increases for non-resident investors and worsening forecasting contributed to the massive exodus of investors from this Latin American country.
Under these conditions, the Argentine peso exchange rate collapsed at the end of April. To support the national currency, the Argentine Central Bank raised the interest rate from 27.25% to 40% and in one week sold almost 10% of its foreign currency reserves trying to intervene in the market. However, those measures that should have worked, did not work out. The price of the peso continued to fall. What were the reasons why these measures were not enough?
Salikhov believes that the cause of this is the policy applied by the Argentine president, Mauricio Macri. When he came to power in 2015, the president promised to radically change economic policy in Argentina.
His strategy was based on a plan to reduce the budget deficit over several years. At first the players of the market believed in his promises and foreign investments in the economy increased. These flows allowed the Macri government to reduce the deficit. However, after the first reports appeared that the goals set by Macri were being reconsidered, investors abandoned the Argentine market.
Erdogan’s Ill Lyre
For a long time, Turkey has also been the weak point among developing countries, the analyst stressed.
“Today, the country has an imperfect current account deficit of between 4 and 6 percent of GDP and a chronic budget deficit of 2 percent to 3 percent of GDP.” In these conditions, Ankara must constantly increase its external debt,” said the author.
Last year, the Turkish authorities decided to support the economy and gave credits to those in need. This soft credit policy allowed Turkey to increase GDP growth by 7.4%. The increase in money in circulation contributed to a 10% increase in inflation.
Despite this, the Central Bank of Turkey was in no hurry to raise interest rates and show its independence. International investors, on the other hand, were very concerned about this move and with statements by Turkish President Recep Tayyip Erdogan that lowering interest rates could help reduce inflation.
Salikhov stresses that this completely contradicts traditional economic theory: it is not possible to reduce the rate of inflation without resorting to a higher interest rate because this measure helps reduce the volume of money in circulation.
Prominent American economist Paul Krugman believes the new global economic storm will resemble the 1998 Asian crisis.
At that time, the devaluation of the national currencies of the developing countries led to an increase in the burden of their external debt denominated in foreign currencies. As a consequence, the burden of real debt has done nothing but increase. This increase has weakened the economy of Asian states.