Other risks to which we must pay attention are those arising from emerging markets. In this case, one should not focus only on one country, as there are numerous fronts open. For example, the latest update to the IMF forecasts cut the growth forecasts for Argentina and Brazil, stressing the more difficult finanacial conditions and the need for adjustments to the Argentinian economy while, in the case of Brazil, it stressed the effect of strikes and political instability.
The rescue agreed with the IMF will result in difficult times for Argentina, given that it will have to tackle a current account deficit of -4.8% of GDP and a public deficit of – 6.5%, in the shadow of foreign government debt of 140 billion dollars and high inflation. In fact, Argentina’s consumer inflation rose to 29.5% per annum in June and the peso became the mirror of all these problems accumulating a depreciation of almost 50% against the dollar in 2018, reaching a rate of 27.3.
As for Brasil, the IMF´s cut in growth forecast stands out, by -0.5% to 1.8% for 2018, as it was the largest adjustment among the major economies. In the short term, as we get closer to next October´s elections, the political noise will increase and this could result in worse financing conditions for the country, given increasing caution among international investors. Moreover, some independent studies point out that inflation could increase above 8% per annum in July and increase the pressure on the central bank to increase interest rates, being forced to sacrifice short term growth to maintain stability, also from a currency perspective. The recent improvement in the real will not be sustainable over time, unless there is some reversal of the process which has lowered interest rates in Brazil from 14.25% in summer of 2016 to 6.5% now.
Closer among emerging markets is Turkey, where the main problem is the taking of control of the central bank by the political authorities. At its last meeting, the Turkish Central Bank decided to maintain the one week repo rate (the offical reference rate) at 17.75%, when the markets were expecting a rise of + 100 b.p. The Turkish monetary authorities justified their decision on the grounds of signs of deceleration in domestic demand, which in their opinion are ever more evident, which they contrasted with the strength of foreign demand. It is difficult to make this justification fit with inflation over 16% per annum in July. It didn´t please investors, dragging the lira to minimum levels against the dollar as the decisión was interpreted as evidence of the reduced independence of the Turkish central bank.
The lack of independence of the Turkish central bank is bad news, especially for the companies already beginning to feel the burden of more expensive imported godos. The margins of many companies are beginning to suffer, above all those with greater foreign exposure who also often depend on foreign currency denominated debt and foreign investors. This is estimated to amount to around 300 billion dollars and explains why some companies are beginning to “feel choked by their debt”. The problem is not only foreign currency denominated external debt, but also that perceived deterioration works against capital flows in a country which had a cuurent account deficit of 5.6% of GDP in 2017.
Therefore, the possibility of problems of even greater Depth in Turkey should be considered high, especially given the confrontation with the US over the treatment of an American pastor detained in Turkey on charges of terrorism and spying. For the time being, Trump has threatened to impose significant sanctions on Turkey if the situation of the US citizen is not resolved.