Devaluation Deepening in Emerging Markets

Devaluation Deepening in Emerging Markets

The International Monetary Fund (IMF) is currently putting out a new wave of bailouts. Many of the planet’s most indebted countries are on a path of surrendering their currency markets.

Three debt-burdened nations have already dropped their exchange rates to receive International Monetary Fund help this year. These are Egypt, Pakistan, and Lebanon. Eventually, this might look like the start of something big. Currency dealers are preparing for a potential new wave of devaluations in the developing world. Moreover, at least two dozen countries are waiting in line for rescue funds.

Some emerging and frontier economies have unsustainable debt loads and dollar shortages due to their slowing economies.

Weaker currencies are a double-edged sword

Distortions in emerging markets like Nigeria and Lebanon have resulted in the adoption of several exchange rates. This happened due to currency pegs and managed exchange rates.

Weaker currencies may help a nation become more competitive in trade. However, they might also lead to greater inflation and ballooning debt payments. Hasnain Malik is a strategist at Tellimer in Dubai. He suggests investors should be cautious of routs in nations on the verge.

In August 2015, China abruptly decreased the yuan. This caused a six-month global selloff that wiped $13 trillion off equity market capitalization. With smaller markets pressured to weaken their currencies significantly, such reverberations are unlikely this time around.

Let’s look at some of the nations caught up in a devaluations spiral

Argentina has unveiled restrictions on who may get dollars and how. This resulted in a dozen overlapping exchange rates as the country attempted to ward off a sudden devaluation. On the streets of Buenos Aires, a dollar costs 373 pesos, but the official rate is 190. The IMF has asked that the limits be lifted, and it has pledged $44 billion in funding.

Meanwhile, following elections later this month, Africa’s biggest economy is likely to depreciate the naira, with Bloomberg forecasting a fifth of a percent depreciation. In the informal market, the currency is worth around 755 per dollar, whereas the official rate is 460. Nigeria, like Argentina, has several exchange rates for various transactions.

In May, Malawi reduced the kwacha by 25%, citing a shortfall in foreign currency, and Ethiopia has responded by cracking down on the black market. In comparison to the official rate of 53.5, the birr trades at around 99 cents per dollar.