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Emerging Market Contagion Spreads

  • Written by Syndicated Publisher No Comments Comments
    January 28, 2014

    Argentina Institutes 50% Tax on Internet Purchases; Emerging Market Contagion Spreads; Argentina, Venezuela, Turkey Roundup Yesterday, Argentina devalued the Peso hoping to halt further declines in its currency reserves. Markets had seen this coming as charts of the Peso vs. the US dollar show.

    Peso vs. US Dollar One Week

    Peso vs. US Dollar One Month

    Peso vs. US Dollar Five Years

    In the past 12 hours the peso fell as low as 8.164 to the dollar but currently sits at 7.164. Using the current close of 7.164 as our reference, here is a summary.

     

    • In the last week the peso fell from 6.643 to 7.164.
    • In the last month the peso fell from 6.362 to 7.164.
    • In the last five years the peso fell from 3.07 to 7.164.


    The 5-year decline is over 50%.

    Emerging Market Contagion Spreads

    Bloomberg reports Contagion Spreads in Emerging Markets as Crises Grow

     The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by political and financial instability.

    The Turkish lira plunged to a record and South Africa’s rand fell yesterday to a level weaker than 11 per dollar for the first time since 2008. Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low.

    Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.

    “The current environment is potentially very toxic for emerging markets,” Eamon Aghdasi, a strategist at Societe Generale SA in New York, said in a phone interview yesterday. “You have two very troubling things: uncertainty about the Fed policy, combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment.”

    Venezuela Reserves

    In Venezuela, the government devalued its currency for airline tickets and incoming foreign direct investment on Jan. 22. International reserves are at a 10-year low.

    Turkey Reserves

    The lira plunged to a record 2.3224 per dollar and also declined to an all-time intraday low of 3.2069 per euro. Turkey’s central bank refrained from raising benchmark rates this week, fueling concern that it will be difficult to finance current-account deficits.

    Turkey holds about $33 billion in foreign reserves, excluding deposits from commercial banks, only enough to cover 1 1/2 months of imports, according to Citigroup Inc.

    Argentina Devaluation

    Yesterday, Bloomberg reported Argentina Devaluation Sends Currency Tumbling Most in 12 Years

    50% Tax on Internet Purchases

    The BBC reports Argentina restricts online shopping as foreign reserves drop

     Argentina has introduced new restrictions on online shopping as part of efforts to stop foreign currency reserves from falling any further.

    Anyone buying items through international websites will now need to sign a declaration and produce it at a customs office, where the packages have to be collected. The procedure will need to be repeated for every new purchase.

    Argentina’s reserves of hard currencies dropped by 30% last year.

    The government of President Cristina Fernandez de Kirchner has introduced a number of restrictions on transactions with foreign currency.

    Items imported through websites such as Amazon and eBay are no longer delivered to people’s home addresses. The parcels need to be collected from the customs office. Individuals are allowed to buy items up to the value of $25 (£15) from abroad tax free every year. Once the $25 level is reached, online shoppers in Argentina need to pay a 50% tax on each item bought from international websites.

    One resident of Buenos Aires, who gave his name as Martin, described the tax as “crazy”.

    But he told the BBC: “The real problem is that the item is received in customs now instead of at your home. Each time you go to customs, you need to spend three or four hours.

    Food Price Controls

    Earlier this month, Reuters reported Argentine peso at new lows as food price controls take effect

     Argentina’s peso slid to an all-time low on Tuesday as supermarkets froze prices in a deal with the government aimed at shielding poor families from one of the world’s highest inflation rates.

    The year-long price fix on 200 basic food products signals continuation of President Cristina Fernandez’s interventionist policies even as polls show her image has been battered by 25 percent inflation, falling reserves and electricity shortages.

    Tight currency and trade controls, as well as last year’s state seizure of Argentina’s top energy company YPF have taken a toll on confidence, while the electricity grid, ailing from lack of investment, fails to keep air conditioners humming at the height of the Southern Hemisphere summer.

    The supermarket price freeze is the biggest policy move yet by fledgling Economy Minister Axel Kicillof, a leftist academic appointed in November.

    Widely discredited official figures put inflation in the 12 months through November at 10.5 percent, while private economists say Argentine inflation is running at more than 25 percent annually.

    Argentina is meanwhile struggling to attract the tens of millions of dollars it needs to develop its Vaca Muerta shale formation. Lying beneath the Patagonian plains, the Vaca Muerta (Dead Cow) field is estimated to hold 661 billion barrels of oil and 1,181 trillion cubic feet of natural gas.

    It could be one of the biggest formations of its kind in the Western Hemisphere.

    Black Market Purchases Will Soar

    Price controls and currency pegs at ridiculous rates cause black markets. With the additional 50% tax on online purchases, expect black market trade to soar.

    Ag Connection

    Argentina gets what little foreign reserves it has, being the number 3 soybean and corn supplier, as well as its top provider of soymeal animal feed and soyoil, used in biofuels.

    Soybean Monthly Chart

    Corn Monthly Chart

    Soybean prices are still well above the 2009 lows, but are also far below the highs of a year ago. The price of corn is far below the highs of a year ago, and nearing the 2009 lows.

    These trends are heightening the already huge problems of emerging market exporters.

    Read more at

    http://globaleconomicanalysis.blogspot.com/2014/01/emerging-market-contagion-spreads.html#s44LliyV0I9zrWBe.99

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.
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