PREMIUM FREE TRIAL

Dark days for SA’s rand as Turkish lira blowout sparks EM financial crisis fears

JOHANNESBURG — Turkey’s economic blowout is starting to look like Nenegate on steroids. For starters, that country’s strongman leader, President Recep Tayyip Erdoğan, recently installed his son-in-law as Finance Minister. Apart from this problematic situation, Erdoğan has also essentially captured the country’s central bank, doing away with sufficiently raising interest rates to cope with runaway inflation (15.85%) at a time when Turkey’s foreign debt levels have also become unsustainable. Added to the mix is US President Donald Trump’s move to double steel and aluminium tariffs on Turkey and we now have the perfect economic storm. The Turkish lira plunged dramatically on Friday and has fallen another 10% on Monday morning to ₺6.85/$. Unfortunately, the next currency feeling the first waves of the Turkish tsunami is the highly liquid South African rand which on Monday morning had already weakened to R14.55/$. Traders and investors are now looking more closely at the beleaguered South African economy to see if it too is on the verge of a similar financial crisis. Luckily, SA (unlike Turkey) still has an independent and well-run Reserve Bank and hopefully will be able to bat off any further concerns. But the imperative has never been higher to get the SA economy growing again. – Gareth van Zyl

By Cormac Mullen

(Bloomberg) – South Africa’s rand plunged the most in almost a decade and Mexico’s peso slumped as financial turmoil in Turkey sapped demand for emerging-market assets.

The two currencies fell along with their developing-nation peers as Turkey’s lira tumbled for a fourth day after President Recep Tayyip Erdogan showed no signs of backing down in a standoff with the US administration. As investors worry about the country sliding toward a full-blown financial crisis, traders are trimming their holdings of developing-nation securities.

Commemorative South African rand banknotes sit on display in Pretoria, South Africa. The new notes and coins are being introduced to commemorate the life of Mandela, the nation’s first black president, who would have turned 100 on July 18. Photographer: Waldo Swiegers/Bloomberg

The lira’s slide “may fuel volatility in emerging-market assets and dampen investor sentiment in the near term, as markets are already skittish,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management in Melbourne. “But the drivers of the lira’s decline are very specific to Turkey – therefore it should not derail the positive fundamentals in other emerging markets over a longer term.”

Investors were already cautious about emerging markets as the prospect of a global trade war compounded concerns about a more hawkish Federal Reserve and European Central Bank. In South Africa, uncertainty about the ruling party’s policies on land and mining has also contributed to the rand slumping more than 15 percent decline against the dollar this year.

The rand was 4 percent lower at 14.6617 per dollar as of 12:55 p.m. in Tokyo on Monday after sliding as much as 9.4 percent, the most since October 2008. Mexico’s peso slid as much as 2.3 percent, the biggest decline since January 2017.

Read also: Here’s what the US trade stand-off means for SA’s rand – Azar Jammine

“The rand should continue to be influenced by the Turkish lira crisis through the sentiment channel,” Societe Generale SA strategist Jason Daw wrote in a research note. “Until the lira stabilises, the prospects for the South African currency are not encouraging.”

Emerging Asian foreign-exchange markets were also hit, though to a lesser degree. India’s rupee dropped to a new record low, while the Indonesian rupiah slumped 0.9 percent.

Healthy foreign-exchange reserves and robust fundamentals mean Asia’s emerging economies are in a strong position to withstand any external shocks, said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis Asia Ltd. in Hong Kong.

Make Better Decisions. Start your Biznews Premium FREE TRIAL today.