It’s been a chaotic 2014 for the Argentine peso, the Turkish lira, and South Africa’s rand. A falling currency alarms investors and risks inflation, but defending it from depreciation requires imposing high interest rates or using up precious reserves of foreign exchange.
Analysts at HSBC devised a taxonomy of emerging markets that separates the bad from the good. Here’s a paraphrase of the bank’s take:
① The badly managed
Argentina, Venezuela, Ukraine
Unwillingness to let currencies fall has led to rapid losses of foreign exchange reserves. The HSBC analysts say a complete “macro overhaul” is needed.
② The trade deficitand inflation club
Brazil, Turkey, Indonesia,India, South Africa
These countries need to cheapen their currencies to shrink yawning trade deficits and impose reforms to increase productivity.
③ The cyclically vulnerable
Czech Republic, Hungary, Mexico
Fundamentally strong, yet typically hit hard in a global downturn, they should recover once their major trading partners start buying again.
④ The happy depreciation club
Peru, Chile, Thailand, Israel
Retaining the confidence of investors, they were able to lower interest rates in 2013. They don’t mind if their currencies get a little cheaper.