Commodity prices have taken a hammering lately, mostly due to investor concerns about the Fed’s tapering of quantitative easing (QE) and the implications for emerging market growth.
But how significant are these risks and do we really need to be concerned that the gradual reduction of QE is going to have any impact on metals demand?
A recent article by the FT examines the major emerging markets, evaluates their current condition and the likely impact of further reductions to monetary easing. Firstly the good news, at least for the global economy: China is not in any danger of imploding from a withdrawal of QE.
Protected by massive foreign exchange reserves, a strongly positive current account and positive balance of payments, it can weather external influences such as a withdrawal of global liquidity. In other words, China can escape trouble – if not entirely unscathed, at least without risk of significant damage to growth.
Not so fortunate are some other emerging markets, however; the front runner for concern is probably Turkey.
The current account balance has deteriorated from under 6% in 2007 to over 7% today. Government borrowing costs on 10-year bonds have risen from under 7% a year ago to about 10% today and the currency is sinking fast.
Worryingly, the country has significant external financing, yet a ratio of only 0.3 years of coverage in foreign exchange reserves to gross external financing commitments, leaving the economy exposed to a further deterioration in the exchange rate. Inflation is persistently high and, as a result, the government, shaky at best, has had to raise interest rates another 2-3% last month.
Politically, Prime Minister Recep Tayyip Erdogan’s government is increasingly unpopular and that uncertainty is not helping inward investment or confidence.
Cry For Me, Argentina
While on the subject of unpopular administrations facing trouble, Cristina Fernández de Kirchner’s government is presiding over plummeting public confidence in her increasingly desperate administration.
Moody’s, the credit rating agency, is quoted by the FT as predicting that the peso will lose another 50% of its value by the end of the year because Buenos Aires lacks a credible plan to deal with inflation and the currency’s slump. The peso’s devaluation will fuel increased inflation, which was unofficially 28% in 2013.
Although officially the inflation rate is 11 percent, the government has admitted this must be revised after censure from the International Monetary Fund. “There could be a spiral of devaluation and inflation,” Gastón Rossi, a former deputy economy minister, is quoted as saying.
The central bank raised interest rates by 6% to about 26% last week in an effort to narrow negative real rates, reduce inflationary pressure and discourage Argentinians from taking refuge in the dollar, but economists are warning it may need to be closer to 40% to lure investment back into the peso.
Coming Up: We look at Brazil’s woes, and how all of these countries’ downfalls affect metals markets.