The devaluation of global currencies is accelerating. Emerging nations around the world are being being devastated by the flight of investors from less stable currency to the major reserve currencies of the world. Confidence is rapidly eroding in the domestic currencies in some of the leading nations across Asia and Latin America. The flight to the more stable currencies like the Euro and especially the American dollar, is intensifying.
China Railway HXD1B Manufacturing Company
The reasons for the erosion of national currencies in emerging nations are not difficult to identify. The slowing world economy mirrored by the dramatic decline in the expansion of the Chinese economic juggernaut, has impacted growth everywhere. The collapse in commodity prices especially in the energy sector, has brought a number of countries to the brink of bankruptcy.
The global economy is awash in coal, oil and natural gas. The abundance of supply, has reverberated across the renewable energy industry as well. The more expensive alternatives like solar and wind have been especially impacted.
The continuing strength of the American dollar, has exacerbated the situation in much of the developing world. Much of the pricing of world commodities is done by using USD (United States Dollars). It has allowed a reprieve for this leading reserve currency, which had previously been under pressure due to rising debt, low interest rates and the policies of quantitative easing.
The situation will worsen if the American central bank known as the Fed (Federal Reserve System) finally decides to begin to increase interest rates, which have not been raised since 2006. They have been near zero at 0.25% since 2009. This artificially low level has distorted the American and the global economy. It has driven capitalists from the traditional vehicles of investment like bonds, commodities, mortgages and other types of securities to stocks and far riskier venues.
The rapid devaluation of currency in the leading nations of the emerging world, has caused an inflationary cycle to take hold in these domestic economies. It is the opposite of what is occurring in the more stable economies of Japan, the Euro-zone, the United Kingdom and the United States. At least for now, the concern in the developed world is deflation, but that can also change in a relatively short period of time.
Jakarta, the capital of Indonesia and the country’s largest commercial center.
The biggest decline is in Southeast Asia. The currencies of Indonesia and Malaysia are now at 17 year lows. Just four years ago 1 USD was worth 8,500 Indonesian rupiah, that rate has dropped to nearly 14,000 this summer. This is over a 60% decline. In 2011, the Malaysian ringgit was convertible at a rate of 3 to 1 USD. It has now dipped to 4, a 33% drop in value.
Malaysia depends on oil exports for 30% of total revenue. With oil prices down by half, the economy has taken a major hit. Commodities make up 60% of Indonesian exports. The drop in world demand is having a severe effect on the domestic economy. The rupiah and ringgit have both fallen against the dollar by 8.4% and 9.8% respectively, this year alone. Since much of the debt in these two countries is dollar denominated, as their currencies fall the cost in servicing these loans rises.
Bangkok is the commercial hub of Thailand
In contrast, the Thai baht has declined 6.4% in 2015 and the Philippine peso by just 2.2%. These two countries have large manufacturing sectors that have provided some insulation, to the precipitous drop in the price for world commodities. Their top exports are computers and electronic parts.
In Latin America, the commodity driven growth is slowing faster than any other emerging market globally. The average currency deprecation in relation to USD has been about 20%, since the middle of 2014. The region as a whole had a reduction in GDP (Gross Domestic Product) by 0.05% in the first quarter of 2015. Brazil is already in recession, with the Brazilian real down 30% in valuation against the American dollar in the past year alone.
Shortages in Venezuela leave empty store shelves in a store.
The oil dependent economy of Venezuela is in free fall, with the price of crude at a record low for 2015. Years of mismanagement, corruption and currency manipulation has brought the Venezuelan economy and the valuation of the bolivar, to the point of collapse.
The GDP is expected to decline by 7% in 2015 and the real inflation rate is expected to be near 95%. Internationally the bolivar has maintained an official valuation of 0.16 in relation to the US dollar, but this has been achieved by a sharp reduction in imports. The more realistic black market rate has gone from 173 bolivars at the beginning of 2015, to 687 per American dollar by August.
It is a similar situation in Argentina. The government under Cristina Fernandez has mishandled the economy and has attempted to influence the value of the domestic currency with disastrous results. The unreliability of domestic government statistics have made it far more difficult to track the official inflation rate, presumed to be in the double digits. Domestically the fiction of the present value of the peso continues, internationally there is no doubt a major devaluation has taken place. There are so many different official valuations, that it is difficult for an investor to keep up with it.
Port of Cartagena, largest in Colombia.
Even in South American countries where there is still economic growth like in Chile, Colombia and Peru, the currencies in relation to USD have seen a major fall in valuation. The Colombian peso has now reached the lowest valuation against the United States dollar, in the 21st century.
Since September of 2014, the Colombian peso has declined by 36%. Last autumn one dollar was worth 1,886 pesos, it is now at 2,935. It is rapidly closing in on the psychological 3,000 level. As expected, inflation is beginning to take hold of the Colombian economy.
The Chilean peso has also slid to the lowest valuation against the United States dollar since the financial crisis of 2008. The Chilean currency is down 10% in the past year, as the price of copper has plunged. The Peruvian sol is down 14% in the past year as well. Again this is due to the sharp drop in the export of minerals.
Although the Central Bank of Peru regularly intervenes in the spot market to defend the value of the sol, Peru has already spent the equivalent of $5.3 billion USD this year. This is far more than was spent in 2014. It cannot continue this practice indefinitely.
Mexico City is the most important financial and economic center in Mexico as well as Latin America.
In Mexico a nation that has an economy tied closely to that of the United States, the peso has also dropped in value against the strengthening US dollar. Growth there is slowing and a lower Mexican peso will help with exports, but it is correspondingly making imports more expensive.
Less than 2 years ago the peso was worth more than 0.080. It has now shrunk in value to 0.061. In the last year alone, the Mexican peso has lost 21% of its value against the dollar.
Elsewhere, the well publicized plunge in value for the Russian ruble has somewhat stabilized, but there will be no real improvement, with the country mired in recession. The government of Vladimir Putin has used extensive amounts of foreign exchange in defense of the ruble. Yet these actions merely attempt to deny the obvious.
Yearly inflation in Russia since 2008
The ruble is weakening, as a result of the state of the Russian economy. The government dependence on crude oil exports for revenue, is creating a major drag on growth. The priced for internationally priced Brent oil is now below $50 USD. Although the ruble has substantially increased in valuation since the lows of of 2014, it has not risen above 70 against the American dollar since February of this year. The present valuation is 63.60.
Turkey is also experiencing a decline in the value of the lira. Slowing growth and a huge current account deficit, is putting increasing pressure on the Turkish currency. Instead of making necessary economic reforms, the government is instead attempting to influence the central bank to keep interest rates lower than dictated by the present inflation rate.
Söğütözü business district in Ankara, the capital of Turkey
President Erdogan foolishly believes that higher interest rates fosters more inflation. The Turkish lira had already dropped to historical lows against the dollar in June, with a valuation of 2.8096 after an additional 5% decline ahead of elections there.
The big question now is, when will the United States decide to start raising interest rates? When it finally does happen, it will bring about a foreign currency flight from emerging markets towards the United States. This will lead to a further devaluation of many world currencies and a new round of domestic inflation in many emerging economies. A partial recovery in world commodity prices could bring some relief, but this seems unlikely at least in the short term. The IMF (International Monetary Fund) just recently reduced the outlook for world economic growth from 3.5% to 3.3% in 2015. There will not be a global surge in demand for commodities any time soon.