Due to the COVID-19 Economic Shock... Emerging Market Currencies Plummet

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The currencies of emerging countries such as Turkey and Brazil have been plummeting, intensifying economic instability in these nations. Argentina, which is on the verge of its ninth debt default, recorded its lowest foreign exchange reserves in six months.

According to Bloomberg and other sources on the 6th (local time), the Turkish lira exchange rate closed at 7.1914 lira per dollar, up 1.66% from the previous trading day. On the 7th, the lira surpassed 7.2 during trading, approaching the historic high of 7.236 lira recorded in August 2018. Brazil, the largest economy in Latin America, is also seeing its exchange rate hit record highs day after day. The Brazilian real exchange rate rose 2.46% from the previous trading day to 5.7158 reals per dollar. Compared to the beginning of the year, it has increased by more than 42%. When the exchange rate rises, the currency value falls. Bloomberg pointed out, "Emerging market currencies have fallen into a depreciation trap. Depreciated currencies pose the greatest threat to vulnerable emerging countries trying to rebound."

The decline in emerging market currencies is occurring mainly in countries with high uncertainty due to the novel coronavirus (COVID-19). Turkey recorded over 130,000 confirmed COVID-19 cases, the highest in the Middle East. The resulting inflation, rising unemployment, and fears of economic recession are rapidly spreading, continuously dragging down the value of the lira.

Brazil is also experiencing a delayed spread of COVID-19 after the US and Europe, further fueling concerns about an economic downturn. In Brazil, nearly 7,000 new COVID-19 cases were reported in a single day, prompting lockdown measures in 10 cities on the 5th. On the same day, credit rating agency Fitch maintained Brazil's sovereign credit rating at 'BB-' but revised the outlook to 'negative.'

As financial instability grows due to currency depreciation, governments are taking action. Turkish regulators recently restricted some lira-related transactions at banks to prevent speculation using the lira. Berat Albayrak, Turkey's Minister of Treasury and Finance, denied the International Monetary Fund's (IMF) forecast that Turkey's GDP would contract this year due to COVID-19, asserting that Turkey's GDP will grow. He also emphasized that necessary measures will be taken to ensure financial stability.

The Central Bank of Brazil also lowered its benchmark interest rate from a historic low of 3.75% to 3.0% on the same day. While the market initially expected a 0.5 percentage point cut, the central bank took preemptive action, anticipating that the economic situation would worsen more than expected.

High debt levels are another factor shaking emerging markets. Argentina, which is negotiating debt restructuring with creditors, is a prime example. Last month, the Argentine government proposed to creditors a three-year grace period on debt repayment, a 62% cut in interest, and a 5.4% reduction in principal for its $65 billion (approximately 80 trillion won) debt restructuring. However, creditors rejected the proposal, and revisions are currently underway behind the scenes. Foreign media report that it is likely the government will miss the negotiation deadline of the 8th but that both sides are trying to avoid default. The default point is expected to be on the 22nd of this month, when the grace period for interest payments on dollar-denominated bonds ends. Argentina's foreign exchange reserves stood at $43.41 billion on the day, the lowest since November last year.

The emerging market crisis is spreading to countries with high debt ratios such as Venezuela, Lebanon, and Zambia. These countries have faced increasing difficulties securing cash since the outbreak of COVID-19. Market concerns are growing that capital outflows from emerging markets due to COVID-19 could make debt repayment difficult. Pressure is also mounting to discuss repayment deferrals or debt restructuring.

This content was produced with the assistance of AI translation services.