In my very first post this morning I mentioned the weakness in the Hungary bond market and the rout of the currency. That was courtey of a research piece from my former employer. The WSJ picks up on that them with a lead article on weakness in Emerging Market Europe.
The pullback from emerging-market currencies continued Thursday. Charles Forelle explains how we got here and what it might tell us about the state of the global economy.
Until this week, European emerging markets had largely dodged the vicious selloff that has swept through their peers elsewhere. Now, they are cracking.
The Hungarian forint took a heavy blow early Thursday, dropping as much as 1% against the dollar. The Polish zloty and the Czech koruna also stumbled.
The currencies clawed back some ground late in the day, but analysts cited Thursday’s gyrations as a sign that the market’s fear of investments seen as risky is broad. Whether bouts of weakness in such countries persist will be a barometer of wider emerging-market strains.
None of the Central European countries has nearly the problems of Turkey, which is battling political scandal and a wide trade deficit, or South Africa, which also relies on regular inflows of foreign cash. Turkey’s andSouth Africa’s central banks made surprise rate increases earlier this week to try to stop sharp declines in their currencies.
“The market is in a funk,” said David Hauner, head of emerging European economics at Bank of America Merrill Lynch. It “has moved to a higher level of fear about capital flows.”
At the apex of fear in Central Europe is Hungary. Thursday, the Hungarian forint’s decline accelerated even as the Turkish lira, which has plunged in recent weeks, held relatively steady. The forint fell as low as 312 to the euro, marking the Hungarian currency’s weakest point in two years.
But Hungary, unlike Turkey and South Africa, has a surplus in its current account—a broad measure of its trade and investment balance. It thus isn’t reliant on a steady stream of foreign financing. And it has copious reserves of foreign currency.
Workers protest outside a Lonmin platinum mine in South Africa on Thursday. The country’s central bank raised interest rates this week. Associated Press
Still, Hungary has a relatively large amount of external debt, which it needs to roll over. Some 440 billion forints ($1.9 billion) of debt matures Feb. 12, and another big payback day, equivalent to $2.28 billion, falls in August. Further hefty bonds come due in 2015.
The decline in the currency puts the central bank in a tight spot. It has been lowering borrowing costs steadily—the policy rate is 2.85% now, after 18 successive monthly cuts meant to bolster economic growth. Its governor, Gyorgy Matolcsy, said Wednesday that the bank has room to reduce rates further. The central bank next meets on Feb. 18.
Hungary “certainly does not belong to the group of South Africa, Indonesia and Turkey with large current-account deficits,” says Jaco Rouw, a senior portfolio manager at ING Investment Management International. “The forint moves are confirmation of general risk-off, rather than things suddenly turning for the worse in Hungary.”
Signs of serious market trouble in Poland would be even more worrying.
Poland has a bevy of comforting statistics: Its economy is growing, and its government debt equals 58% of gross domestic product, compared with 93% in the euro zone and 87% in the 28-member European Union.
“The turmoil really underlines the need for greater differentiation in emerging markets,” said Neil Shearing, chief emerging-markets economist at consultancy Capital Economics. “Poland has far more in common with Germany than it does with Argentina.”
Nonetheless, the Polish zloty lost ground against major currencies early Thursday. It is off about 3% against the dollar this year; the Turkish lira is off 5%.
“The risk is that it gets dragged in” to the turmoil gripping more fragile emerging markets, Mr. Shearing said. “If things get really ugly the central bank might be forced to raise interest rates, which would slow growth.”
Poland’s central bank meets Wednesday, and is expected to keep its key lending rate unchanged at 2.5%, a level that is far above the European Central Bank’s 0.25% benchmark rate and the neighboring Czech Republic’s 0.05%.
Poland’s finance minister said Thursday he is “not losing any sleep” over the continuing selloff of emerging-market currencies. Mateusz Szczurek said he is confident Poland won’t be affected by the market turmoil, but he said Poland wants to extend a flexible credit line from the International Monetary Fund for two more years. Warsaw now has a $34 billion credit line it hasn’t tapped.
Jeronmin Zettelmeyer, deputy chief economist of the European Bank for Reconstruction and Development, said in an interview that the International Monetary Fund and other bodies are better prepared for crisis-fighting than they were during the last serious emerging-market crisis, in the late 1990s. But he warned that problems in emerging markets could cause greater damage to the global economy now than they might have then. “We have some really big emerging markets out there and they can move global GDP,” he said. “It’s no longer true that emerging markets are small.”
The rumble in vulnerable currencies this year started as a series of woes specific chiefly to countries highly reliant on regular inflows of foreign cash. They are likely to find it harder to obtain those funds as the U.S. gently tightens its monetary policy.
Economies with puny stashes of foreign reserves, useful for fending off selloffs, also have seen their currencies fall. Acute political troubles have placed pressure on markets in Argentina and Ukraine.
The spread to steadier markets in Central Europe works through two self-reinforcing channels: Traders and investors close out profitable, longer-term bets on more liquid emerging-market currencies, such as those of Poland and Hungary, or they simply become more nervous about how stresses may snowball.
“I don’t think the current selling is warranted, but a lot of people don’t want any exposure to emerging markets at the moment,” said Yannick Naud, a portfolio manager at Sturgeon Capital, which manages $270 million of assets.
“We have some exposure to Hungary, and have tried to increase it recently. Any further weakness in Central and Eastern Europe should be an opportunity to get involved,” Mr. Naud said.