After losing about a third of their value in three years, South Africa’s rand and Turkey’s lira still need to fall further to reach levels that make their economies competitive.
The lira is 12 percent overvalued and the rand is 10 percent too expensive, the most in a UBS AG gauge that assesses 22 exchange rates according to their trade balances. While the currencies have risen over the past six weeks, that is a result of interest-rate increases rather than economic improvements, according to Societe Generale SA.
“The rand and lira are still expensive,” Shewta Singh, an emerging-market economist at Lombard Street Research, said in a March 13 interview in New York. “The currencies are not appealing relative to the risks.”
While Turkey’s and South Africa’s current-account deficits have started shrinking from their record highs, they’re still about twice the size of their developing-nation peers, signaling further foreign-exchange losses. Options traders are the most bearish on the lira of 31 major currencies tracked by Bloomberg after Argentina’s peso, while foreign investors are pulling money from South Africa’s bond market for a second quarter.
Emerging markets have been rocked in recent months, with a Bloomberg custom index of the 20 most traded currencies falling to a five-year low on Feb. 3 amid concern that China’s economy is slowing just as the U.S. Federal Reserve pares its stimulus and tensions between Russia and the U.S. rise over the Ukraine. At the same time, Argentina unexpectedly devalued its peso and Turkish Prime Minister Recep Tayyip Erdogan’s cabinet became embroiled in a corruption scandal.
Economists surveyed by Bloomberg cut their growth forecast for Asia, Latin America and Eastern Europe this year to an average 3.73 percent, from 3.98 percent. While rate increases from Russia to Brazil have helped bolster emerging-market currencies, strategists at Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. aren’t convinced the worst is over.
After Argentina’s peso, the rand is the worst performer against the dollar among 24 emerging-market currencies tracked by Bloomberg since March 14, 2011, tumbling 36 percent. The lira has weakened 29 percent.
The rand touched an almost 5 1/2-year low of 11.3909 per dollar on Jan. 30, before recovering to 10.6711 on March 14. It declined 0.6 percent to 10.7358 by 12:29 p.m. in New York. The lira is 3.3 percent weaker since the start of 2014, dropping to a record 2.39 on Jan. 27 and ending last week at 2.2128. The lira weakened 0.4 percent to 2.2207 today.
Morgan Stanley in August dubbed the rand and lira, along with Brazil’s real, India’s rupee and the Indonesian rupiah, the “fragile five” emerging-market currencies because of their reliance on foreign capital to finance deficits in their current accounts, the broadest measure of trade because it includes investments.
Turkey’s deficit will narrow to 6 percent of gross domestic product this year, from 7.4 percent in 2013, according to economist estimates compiled by Bloomberg. That would still be the highest in the Group of 20, followed by South Africa. Its shortfall is forecast to expand to 5.5 percent.
Any benefits from currency depreciation are proving hard to come by as sluggish growth in Europe and China, their biggest trading partners, curtails demand.
“Some of these countries need a weaker currency to make sure they stay competitive,” Jim O’Neill, the former chairman of Goldman Sachs Asset Management, said in a Bloomberg Television interview on March 12. O’Neill, a London-based Bloomberg View columnist, coined the BRIC acronym in 2001 to describe Brazil, Russia, India and China, the largest emerging markets.
Other measures of relative value indicate that the declines in the rand and lira have already left them cheap.
The Big Mac Index, which ranks exchange rates according to a purchasing-parity model based on the cost of the hamburger, estimates the rand is 60 percent undervalued, compared with 24 percent for the lira.
UBS says that valuation models based on purchasing power may be misleading in the current economic climate because they overestimate the impact of a weaker currency on trade.
“The global trade link is broken,” Bhanu Baweja, the head of emerging-market cross-asset strategy at UBS in London, who correctly predicted the developing-nation selloff, said in a March 7 interview. For the lira and rand, “you need the currencies to decline further to rebalance their economies,” he said.
Goldman Sachs estimates that to cut South Africa’s deficit to a “sustainable” level of 3.5 percent of GDP would require the rand to weaken 27 percent to 13.5 per dollar, a level last seen in December 2001, when the currency slumped to a record 13.8401. The lira would need to drop 13 percent to an all-time low of 2.5 per dollar, according to the New York-based firm.
The lira has rallied 1.4 percent since the Turkish central bank raised the benchmark one-week repo rate to 10 percent from 4.5 percent at an emergency night-time meeting on Jan. 28. The following day, South African Reserve Bank Governor Gill Marcus unexpectedly lifted the policy rate by 0.5 percentage point to 5.5 percent, prompting a 6.1 percent gain in the rand.
Those rate increases make it more expensive for speculators to bet against the currencies, which may delay the rebalancing of the economies, according to Phoenix Kalen, an emerging-market strategist at SocGen in London.
“We’re starting to see an improvement in the current account but progress is going to be slow with the rand at these levels,” Kalen said in a March 11 phone interview. “At the moment, though, it’s very difficult to push the rand weaker” because of higher rates, she said.
Kalen expects the rand to rally to 10.30 per dollar by year-end, making her more bullish than the median estimate of 31 strategists in a Bloomberg survey, which sees it at 10.96. A separate poll of 27 analysts shows the lira is expected to weaken to 2.25 per dollar by Dec. 31.
Investors withdrew $954 million from South Africa’s bond market since December as mining strikes weighed on the economy, while the Turkish corruption scandal contributed to about $1.7 billion fleeing Turkey’s bonds the first two months of 2014.
Credit Agricole SA estimates the rand will remain little changed at 10.6 per dollar by year-end, and is the third-most bearish firm in Bloomberg’s survey on the lira, predicting an 8 percent drop to 2.4.
“Turkey and South Africa lack competitiveness,” Sebastien Barbe, the head of emerging-market research at France’s third-biggest bank, said in a March 7 phone interview from Paris. “It’s difficult to argue that these currencies have cheapened enough.”