The basic economics of the 1997 Asian emerging markets crash seem to be repeating themselves in other emerging markets in 2018, haunting investors with ‘what ifs’.
The Turkish Lira has depreciated by more than 50 percent for the year.
The country has borrowed heavily in Dollars to finance a construction and property expansion.
The devaluation of the Lira has brought financial pain to the key construction sector. In August, the Ağaoğlu property company was forced to deny bankruptcy rumors.
It’s knocking onto other sectors like retail consumer goods and banking. Hotiç shoes has just filed for bankruptcy, citing an increase in interest rates and loss of cash flow.
Hotiç is unable to pay its short-term debt because the weak Turkish Lira has restricted consumer spending.
In Argentina, the Peso has lost over 50 percent of its value and interest rates are at a record high of 60 percent. Foreign investment is depressed, and banks are having a hard time collecting their debts.
High-profile companies face bankruptcies, and IPOs are being shelved until times are better. The crisis forced the country to ask for early disbursements on a $50 billion loan from the IMF.
Looking closely, there are other parallels to the Asian crisis. The Federal Reserve is hawkish and raising interest rates in the US.
A hawkish Federal Reserve squeezes the emerging economies dependent on US Dollar debt.
Turkey and Argentina borrowed low-interest money from the US between 2008 and 2018 but now face heavier repayment costs because interest rates are going up.
Unstable currencies and out-of-control inflation or interest rates are a sign of deeper problems. Argentina’s growth outlook is negative and many analysts expect Turkey’s currency woes to result in an economic slowdown.
In other parts of the world, financial and macro-economic weaknesses are worrying investors.
South Africa entered a recession in Q2 and China has considerable exposures for its foreign investments in emerging markets like African countries.
If China suffers losses from its ‘One Belt One Road’ foreign lending program and slows down, all the emerging markets slow down, especially those in Asia.