Oil Price Collapse Triggers Currency Crisis In Emerging Markets
Emerging market currencies are getting slammed by the collapse in commodity prices, a downturn that has accelerated in recent weeks.
The health of many middle-income and emerging market economies has been predicated on relatively strong commodity prices. A whole category of countries achieved strong growth by exporting their natural resources. For example, Brazil’s impressive economic expansion since the early 2000s, and the huge number of people that were able to jump into the middle class, was made possible by exporting oil, soy, iron ore, beef, and a variety of other resources. High prices for these goods led to more growth, a strengthening of the currency, and a real estate boom in cities like Rio de Janeiro.
The same story unfolded in many other commodity-driven economies, from Latin America, to Africa, to Central and Southeast Asia.
However, with commodity prices down dramatically from a year ago, growth in these countries has slowed, and their currencies are sharply weaker than they have been in the past.
Related: Oil Prices Must Rebound. Here’s Why
In fact, the fall of Brent crude below $50 per barrel has sparked a sudden downturn in emerging market currencies across the globe.
But it isn’t just oil prices slamming currencies. The worries over the Chinese economy, including the plunge in its main stock market this summer, have raised concerns about the vigor of emerging market economies. Worse yet, China’s surprise devaluation has sent shock waves through currency markets around the world.
Other countries now feel pressure to let their currencies depreciate, and if they have adhered to a currency peg up until now, some are being pushed to float. Kazakhstan decided to scrap its currency peg last week, and the tenge promptly lost 23 percent of its value against the dollar. Vietnam also devalued the dong.
The devaluations tend to have a cascading effect, with other emerging markets coming under increasing pressure from their competitors.
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