- Declines in emerging-market currencies boost competitiveness
- China's gains from further yuan depreciation will be limited
Amid the worst emerging-market currency rout since the global financial crisis, some developing countries can expect a silver lining.
Latin America’s commodity-producing nations, which have seen their foreign-exchange rates fall to record lows, may end up among the biggest winners as their exports become cheaper and more attractive. The countries’ manufacturers stand to benefit after losing their competitive edge in global markets in the past decade as higher prices for goods from copper to oil pushed up currencies and squeezed local production.
Colombia’s peso, after adjusting for trade and inflation, fell 25 percent in the past year, according to data through July from the Bank for International Settlements. Brazil’s real sank 18 percent by that measure, while Mexico’s currency lost 12 percent. China, which spurred the latest round of turmoil with last week’s devaluation, saw the biggest gain -- 15 percent -- when weighting for trade and inflation.
“Some of these sharp declines in emerging-market currencies are no bad thing given the growth picture and the premium on boosting exports,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, an advisory firm in London. “As long as it doesn’t undermine financial stability.”
The lift to growth from weaker currencies comes at a convenient time for Latin America where the economy as a whole is forecast to see no expansion this year, the worst performance for any region in the world, according to economists surveyed by Bloomberg. The competitive gains from a weaker real effective exchange rate will be a tailwind for countries such as Colombia and Mexico, said Ilan Solot of Brown Brothers Harriman.
Mexico’s manufacturing sector is poised to benefit from a combination of a weaker peso and improving growth in the U.S., its biggest trading partner, according to Chris Chapman, a London-based trader at Manulife Asset Management.
“It’s an economy that has been working towards making progress in reforms, and is positioned well to benefit from a stronger U.S.,” said Chapman, whose firm oversees $302 billion. “In fact, much of the manufacturing that Canada would have previously relied on has relocated to Mexico.”
Colombia’s Finance Minister Mauricio Cardenas, who in 2013 called the peso’s strength “the mother of all problems,” has welcomed its drop to a record this month.
“The country was on a strengthening trend that generated great difficulties for industry, agriculture and tourism, and amid the fall in oil prices it’s necessary that the economy has new sources of growth, that it adjusts to this new dollar price,” he told reporters Aug. 13 in Cartagena.
China helped spark this last leg of the global currency rout with a surprise devaluation of the yuan after the exchange-rate appreciation since 2005 eroded it competitiveness. The world’s second-largest economy can’t restore its export edge by weakening the yuan much further, according to Edwin Gutierrez who helps oversee $13 billion as the head of emerging-market sovereign debt at Aberdeen Asset Management Plc. Doing so will backfire by triggering waves of devaluation among its export competitors, he said.
“The gains they get are going to be quite ephemeral,” Gutierrez said from London. “China cannot stimulate its economy through weakening its currency. I guess it’s a case of trying not to have further competitiveness losses compared to the rest of the world.”
While more competitive currencies will help developing nations, the benefits may take a while to materialize in exports and production, according to Gutierrez, who prefers not to take any currency risk in emerging markets at this point.
“It’s not the environment to be taking big positive bets on emerging market currencies, it’s too early,” he said. “Currency exposure in our funds is at historic lows. I’d rather be a little late than too early to the party.”
Peter Kinsella, head of emerging-market economics and foreign exchange research at Commerzbank AG in London, is also hesitant to jump into a market that may see more volatility as the Federal Reserve inches closer toward raising interest rates for the first time since 2006. Anxiety over developing markets has been increasing as higher borrowing costs in the U.S. will limit the appeal of riskier assets.
“We have to see how things shake out and what the U.S. rate cycle looks like before we start thinking about whether we are getting value,’’ Kinsella said.
It might take a while but a weaker, more competitive currency is a welcome change for countries who saw their manufacturing sectors shrink in recent years, according Mario Castro, a strategist at Nomura Holdings Inc. in New York.
“A real improvement will be seen in a couple of years after these countries organize themselves and have their manufacturing sectors in good shape to export,” Castro said.