Out of the Eurozone frying pan: into the emerging markets fire

Will current account deficits across Asia, should we worry about contagion to weak peripheral Eurozone countries?

With the Indian Rupee, the Indonesian Rupiah, the Turkish Lira all selling off 10 per cent or thereabouts versus the USD since the beginning of August, July and May respectively, one is beginning to be reminded of the Asian Crisis of the late nineties, when current account deficit currencies lead the collapse to a full-blown disaster.

Then, as now, hot money had flooded in, as a desperate search for excess returns lead investors to boldy go where a few had never been before. After all, current account deficit countries need that flow of money to stay solvent and now, classically, the flow is suddenly drying up, as the returns on ‘risk-free’ investments, such as US Treasuries, have risen dramatically, (well, risk-free in the sense that you’ll get all your money back if you hold to maturity).

Lack of policy credibility and slowing growth don’t help. The former took a dent last week in India, when the  central bank introduced controls over the amount of money Indian residents and companies can send overseas. The trouble with partial capital controls is that then everyone fears the imminent implementation of full capital controls, and gets their money out as soon as possible, thus weakening the currency, etc, etc. This in addition to three gold import tax hikes this year.

Personally, I feel the chances of a full-blown repeat of the Asian crisis are quite slim-generally speaking, hard lessons were learned then and impressive FX reserves have been accumulated during the good years, also public debt levels are lower and savings rates higher, although Indonesia’s FX reserves are not as impressive as some, but even there the better performance of the economy should mean that a quick dose of higher interest rates will calm things down.

Should we worry about potential contagion to weak Eurozone peripheral countries? I don’t think so, as the current-account balances of Greece, Italy, Portugal, and Spain have all virtually improved to zero, compared to India’s 4.8 per cent deficit.

There’s no doubt that the rising tide of global QE experiments, and Chinese overseas investment, had floated many ships, and that some of them will be left marooned in the mud as the Fed begins to taper down its Quantitative Easing, but whilst a repeat of 1997/98 is probably not something to lose too much sleep over, severe stress in such massive economies as India and Indonesia may, however, have a deleterious effect on regional and even global growth.

At the moment I’d still classify this as a low probability, Black Swan event, given the obvious growth in strength of the recoveries in the US, UK, Eurozone and China. The latter evidenced by the latest The Markit/HSBC flash manufacturing PMI for August of 50.1, versus market expectation for 48.2, (last month 47.7).

Remember, however, the generally accepted definition of a Black Swan event; low probability, sure, but high impact if it comes to pass.

Indian sand artist Sudarsan Pattnaik puts the finishing touches to his sand sculpture of a rupee coin in front of the Hindu Goddess Lakshmi. Photograph: STRDEL/Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Paul Nuttall is like his party: sad, desperate and finished

The party hope if they can survive until March 2019, they will grow strong off disillusionment with Brexit. They may not make it until then. 

It’s a measure of how far Ukip have fallen that while Theresa May faced a grilling over her social care U-Turn and Jeremy Corbyn was called to account over his past, the opening sections of Andrew Neill’s interview with Paul Nuttall was about the question of whether or not his party has a future.

The blunt truth is that Ukip faces a battering in this election. They will be blown away in the seats they have put up a candidate in and have pre-emptively retreated from numerous contests across the country.

A party whose leader in Wales once said that climate change was “ridiculous” is now the victim of climate change itself. With Britain heading out of the European Union and Theresa May in Downing Street, it’s difficult to work out what the pressing question in public life to which Ukip is the answer.

Their quest for relevance isn’t helped by Paul Nuttall, who at times tonight cast an unwittingly comic figure. Pressing his case for Ukip’s burka ban, he said earnestly: “For [CCTV] to work, you have to see people’s faces.” It was if he had intended to pick up Nigel Farage’s old dogwhistle and instead put a kazoo to his lips.

Remarks that are, written down, offensive, just carried a stench of desperation. Nuttall’s policy prescriptions – a noun, a verb, and the most rancid comment underneath a Mail article – came across as a cry for attention. Small wonder that senior figures in Ukip expect Nuttall to face a move on his position, though they also expect that he will see off any attempt to remove him from his crown.

But despite his poor performance, Ukip might not be dead yet. There was a gleam of strategy amid the froth from Nuttall in the party’s pledge to oppose any continuing payment to Brussels as part of the Brexit deal, something that May and Corbyn have yet to rule out.

If May does manage to make it back to Downing Street on 8 June, the gap between campaign rhetoric – we’ll have the best Brexit, France will pay for it – and government policy – we’ll pay a one-off bill and continuing contributions if need be – will be fertile territory for Ukip, if they can survive as a going concern politically and financially, until March 2019.

On tonight’s performance, they’ll need a better centre-forward than Paul Nuttall if they are to make it that far. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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