Heat Is On Developing World To Raise Rates

Turkey’s central bank unexpectedly raised rates to buttress its wilting currency as policy makers across the developing world scrambled to stem the turmoil rattling emerging markets.

The interest rate rise helped the Turkish lira to rally against the US dollar, but elsewhere in emerging markets the turmoil continued unabated. The FTSE Emerging Markets index shed a further 1 per cent to fall to its lowest level in a month, and borrowing costs rose higher across the developing world.The fresh uncertainty came as figures showed how waning investor appetite for emerging markets has caused debt issuance to collapse over the summer. Companies and governments in emerging markets have issued $42.4bn worth of debt since the beginning of June, compared to $95.1bn over the whole of June, July and August last year, according to Dealogic data. June was the slowest month for emerging market bond sales since December 2008.

Investors say countries with big current account deficits are particularly vulnerable to the end of US quantitative easing, but caution that every country will feel the heat.“Higher US rates upset the entire EM apple cart,” said Bhanu Baweja, an analyst at UBS. “If rates continue to go higher, and I think they can, then these markets will suffer even more harm.”

India’s rupee clawed back some of its losses – after hitting a record low on Monday – but other currencies came under pressure from investors.Indonesia’s rupiah tumbled 1.7 per cent to a four-year low, and Russia’s rouble fell to a four-year low against the central bank’s euro-dollar basket.

So far most developing countries have sought to stem the currency declines though market interventions, burning through foreign currency reserves. But fund managers said more countries will have to raise rates to defend their currencies – despite the negative impact on economic growth.
“Some central banks will have to hike,” said Andrew Keirle of T Rowe Price, a large US money manager.“A number of markets are clearly indicating that monetary conditions need to be tighter and more orthodox to support their currency and suspend the outflows,” he said.

Brazil’s central bank president, Alexandre Tombini, on Monday night issued a rare statement saying the market was pricing in too many rate increases, but is still expected to tighten policy this year and continue to intervene in the currency market.

Even the stronger developing countries are suffering from muddled growth rates. Mexico’s economy unexpectedly shrank in the second quarter, according to data released yesterday.