Currency falls raise solvency concerns in emerging markets

Kazakhstan and Vietnam allowed their currencies to fall yesterday, fuelling expectations of further depreciations among emerging market countries that could trigger financial solvency problems.

The dual impact of China’s renminbi devaluation – and worries about the country’s slowdown – along with anticipation of a US rate rise is weighing on currencies in emerging markets, already feeling the pain of falling commodity prices.

The tenge dropped 4.7 per cent, close to the upper limit of the new trading range set last month by the Kazakh central bank. The oil-dependent central Asian country, which trades heavily with Russia and China, is being buffeted by the fall in the rouble and crude prices.

The state bank of Vietnam responded to the renminbi depreciation by widening its trading band and lowering its official midpoint rate. The dong fell more than 1 per cent.

Devaluations

Demetrios Efstathiou of ICBC Standard Bank said he expected a further 5-6 per cent devaluation of the tenge by the end of the year, but even this would not be sufficient.

“I believe that the magnitude of the second devaluation should be at least 10 per cent, if not 15 per cent,” Mr Efstathiou said.

Luis Costa of Citigroup said other countries in the region “should follow suit” with devaluations, but their central banks would have to manage the process.

“They don’t want to have a financial stability impact,” he said. “They have to find weaker currency levels but will have to avoid overshooting.”

As Asian developing countries attempt to fight their way back to stability, amid signs of increasing levels of capital outflows, there are now concerns that currency weakness could expose financial vulnerabilities after years of public and private hard currency borrowing sprees. – Copyright The Financial Times Limited 2015