Given the potential of increasing interest rates in the United States, Mark Mobius, a famous emerging markets investor, believes Turkey may not be the only country facing a currency crisis. “Of course, it can,” Mobius said to a query on CNBC’s “Closing Bell” about whether the rapid decline of the Turkish currency, the lira, might spread to other nations. With increased interest rates in the United States, all these other nations with dollar debt would go down. This was a statement fr0m the investor, who is also the founder of Mobius Capital Partners.
On Tuesday, the Turkish currency fell to a new low. This came as President Recep Tayyip Erdogan defended his central bank’s contentious interest rate cuts amid rising double-digit inflation. Mobius did not say which additional nations would a currency crisis affect. The good news, he continued, is that many developing nations have borrowed more in their home currencies since the Asian financial crisis of 1997.
The currency crisis is a possibility
Investment firm Nomura issued a report last week. According to it, Egypt, Romania, Turkey, and Sri Lanka are the four rising nations most vulnerable to a currency crisis. The research took external debt as a percentage of GDP and the stock market index. GDP is the ratio of foreign exchange reserves to imports.
“Looking ahead, the likelihood of the Fed normalizing monetary policy as China’s economic slowdown deepens is not a very positive mix for [emerging markets],” Nomura wrote in a study last week. The Federal Reserve of the United States should begin decreasing its asset purchases this month. Most Fed officials have stated that they will not contemplate raising rates until the taper is completed. However, markets anticipate a faster rate rise, with the first boost currently set for June 2022.
This comes when developing markets are grappling with other issues. These include expanding fiscal and current account deficits, as well as rising food costs, according to Nomura. In the case of Turkey, Mobius believes that a lower currency will result in more exports.