Kazakhstan’s currency, the tenge, took a 23% plunge on Thursday morning, joining the long list of emerging market currencies—from the Turkish lira to the Brazilian real—that have tanked so far this year.
While the major world currencies of certain developed markets like the pound sterling and the euro have been largely steady, and others such as the U.S. dollar and the Swiss franc have actually gained, the currencies of emerging markets have fared far worse. As many of these countries are heavily dependent upon resource exports to fuel their economic growth, the downturn for global commodities is placing strong downward pressure on emerging market currencies, along with influences from the Fed and China.
Misery Loves Company, Currency Edition
While the central bank in Kazakhstan decided to unpeg the tenge from the dollar yesterday in order to allow it to devalue, it is far from the only monetary authority in the developing world to deal with a currency freefall, whether intentional or the result of forex trading. The same can be said of the Malaysian ringgit, Russian ruble, Turkish lira, Brazilian real, Vietnamese dong, Colombian peso, Ukrainian hryvnia, and South African rand. Although struggling economies often benefit from a cheaper exchange rate in the national currency, which usually boosts exports, a fall too far (like with the 25% drop for the real and hryvnia) usually erodes investor confidence in that country’s economy.
Like many of these developing countries, Kazakhstan’s economy relies upon its export of the country’s rich deposits of crude oil; moreover, the central Asian nation is almost wholly dependent upon its regional trade with Russia and China. Russia, Brazil, and Turkey are being hit by similar commodity crunches, though the latter two countries are also encumbered by crippling government instability and scandal. In the case of Southeast Asian countries like Vietnam and Malaysia, capital flight and foreign divestment is exposing their financial systems to the mounting levels of debt that have accumulated over the last five years.
For those keeping score, the peso, real, hryvnia, tenge, and ringgit have all lost between roughly 20-25% of their values against the dollar, year-to-date. Meanwhile, the rand hasn’t been this weak against the Greenback in well over a decade, and the ruble continues to slide with falling oil prices.
The entire trend of falling emerging market currencies seems to be a progressive domino effect that was greatly accelerated by the People’s Bank of China devaluing the yuan/renminbi by almost 2% last week.
Chinese Yuan Joins the Race to the Bottom
Last week, the surprise devaluation of the yuan had a widespread impact on all sorts of other markets around the world. The move hurt some investors’ trust in the Chinese government to allow its economy to function in the free market, while also dampening the outlook for China in general. The People’s Republic will have to show its willingness and commitment to free market principles in order to shake its well-earned reputation for intervening in its own markets, whether its currency, its equities, or otherwise.
While it may be true that some in the Chinese establishment are serious about opening the economy up to market forces, the ultimate logic behind China building better credibility for its currency is getting the yuan included in the SDR basket. Fully aware of China’s intentions, the IMF has pushed back the timetable for its rebalancing of the SDR currency basket in order to allow the dust to settle on the yuan devaluation pandemonium before making its decision.
The SDR, the IMF’s Special Drawing Rights, is the supranational organization’s unit of account and reserve currency of sorts; inclusion in the basket that makes up the SDR’s value would be an enormous boost to the legitimacy of the yuan as a global currency, bringing all sorts of prestige and expanded trade to the mainland. Inclusion would, for all intents and purposes, elevate the yuan out of the “emerging market currency” category.