Investors zero in on Turkey, South Africa as emerging market risks escalate

Investors are zeroing in on Turkey and South Africa as uncertainty over the outcome of next month’s U.S. elections risks a large sell-off in emerging markets, said Robin Brooks, chief economist at the Institute of International Finance (IIF).

“Storm clouds are gathering on the horizon,” said Brooks, a former chief currency strategist at Goldman Sachs, referring to an acceleration in sales of developing countries’ assets. “Emerging market policymakers need to be very careful.”

Turkey and South Africa have experienced a slump in foreign investment and the COVID-19 pandemic is hitting their economies hard, raising concerns for instability as they respond with economic stimulus measures. Both countries have seen a surge in debt levels and unemployment, tweaking their jobless data to exclude millions of people no longer in work.

Brooks published a chart on Twitter showing so-called high frequency outflows from emerging markets accelerating towards levels last seen during global sell offs in 2013 and 2015. “And that's with U.S. election uncertainty only just coming onto radar screens,” he said.

The Turkish lira hit a record low of 7.85 per dollar this week. The currency has extended a sell-off to almost 24 percent in 2020 even after the central bank hiked interest rates by 200 basis points to 10.25 percent last week to help allay investor concerns over lax monetary policy. Inflation in the country stands at 11.8 percent, meaning real interest rates are negative.

The South African rand has performed better, losing 16 percent of its value this year. It is almost 7 percent stronger than a low reached at the start of April.  But long-standing structural weaknesses and rising debt levels are expected to constrain economic recovery and pressure finances, Standard & Poor’s said in a report on emerging markets this week.

Economic recovery in Turkey may be derailed because the central bank may be forced into a sharp hike in interest rates to protect the lira, S&P said. International sanctions over the country’s territorial dispute with Greece – the European Union’s leaders were meeting on Thursday to discuss possible measures – could further sour investor sentiment, the ratings agency said.

Turkey has also become embroiled in a territorial dispute between Azerbaijan and Armenia, raising the prospect of direct military involvement in a fourth international spat that also includes conflicts in Syria and Libya.

The lira weakened less than 0.1 percent to 7.72 per dollar on Thursday. The rand gained by 0.6 percent to 16.63 against the U.S. currency.