Emerging Markets Act to Stem Capital Flight

Emerging markets from Brazil to India took steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era pumping unprecedented liquidity.

India’s central bank sold dollars the past two days to stem the rupee’s slide, two people familiar with the matter said, while Indonesia unexpectedly raised its benchmark interest rate today. Brazil said yesterday it would unwind some of the capital controls it began putting in place in 2010 -- when the Federal Reserve was embarking on its second round of quantitative easing, known as QE2. Thailand said it sold dollars in the past week.

The moves follow the Bank of Japan’s decision this week to refrain from adding stimulus even after a slide in the nation’s stocks that risks hurting its campaign to revive growth. The MSCI Emerging Market Index of shares has fallen more than 10 percent since Chairman Ben S. Bernanke said May 22 the U.S. Federal Reserve could scale back asset buying if it’s confident of sustained economic improvement.

“People are taking money off the table wherever they made the most money,” said Tim Condon, head of Asia research in Singapore at ING Groep NV, who previously worked for the World Bank. “Markets are re-pricing for what we would see in a normalization of U.S. Treasury yields and all that central banks can do right now is to batten down the hatches. We haven’t seen the end of this volatility.”

Stocks Fall

The MSCI EM index was down 1.6 percent as of 4 p.m. in Hong Kong. The yen, typically a haven in times of global market turmoil because of Japan’s status as world’s top net creditor, climbed 2.1 percent to 94.05 per dollar at 8:29 a.m. in London.

Foreign selling of Thai, Indonesian and Philippine stocks has reached record levels as the threat of reduced Fed monetary stimulus spurs the biggest equity declines since 2011. Overseas investors unloaded a net $2.7 billion from the three stock markets so far this month, the biggest eight-day outflow since Bloomberg began compiling the data in March 1999.

Three years after emerging-market policy makers from Brazil to South Korea warned about destabilization from record Fed stimulus, they are now coping with the prospect of the spigot being tightened. Fed actions have pumped more than $2.5 trillion into the financial system since 2008.

Brazil’s Move

Brazil’s government said yesterday it will eliminate a tax on currency derivatives in a bid to arrest the decline of the real that is at a four-year low. The 1 percent tax had been applied on bets against the dollar in the country’s futures market in a bid to weaken the Brazilian currency. Finance Minister Guido Mantega had already announced on June 4 the elimination of a 6 percent tax on foreign investment in bonds purchased in the Brazilian market.

Indonesia’s surprise increase in its benchmark borrowing cost today comes after the central bank this week raised the rate it pays lenders on overnight deposits and said it’s ready to buy government bonds from the secondary market to support the weakening rupiah. The currency pared losses after today’s decision, having touched 9,925 earlier, the weakest level since Sept. 15, 2009.

Bank Indonesia will continue to sell dollars and buy government debt, Deputy Governor Perry Warjiyo said today. The rupiah is one of the worst performing currencies in Asia in the past year, and overseas investors have pulled more than $2 billion from stocks and local-currency bonds in Indonesia in the past two weeks.

Philippine Assurance

Indonesia’s central bank is studying plans to allow banks to sell their rupiah term deposits to other lenders to ensure rupiah and dollar stability in the market, Warjiyo said.

The Philippine central bank will ensure that price movements including those in the foreign-exchange market are not excessive, Governor Amando Tetangco said today before keeping the benchmark rate unchanged. Recent movements in the currency and stock markets are “part of investor reassessment of global risk,” he said.

The Philippine benchmark stock index fell 6.8 percent today, the biggest drop since October 2008.

Turkish central bank Governor Erdem Basci yesterday said that concern about Fed tapering of asset purchases has created significant market tension, sending bond yields higher across the globe. His Thai counterpart Prasarn Trairatvorakul today said a sell-off in his nation’s stocks isn’t a surprise given a past surge. He told reporters in Bangkok that Thailand sold dollars in the past week to smooth volatility in the baht.

Priorities Changed

“Emerging markets put measures in initially to limit capital inflows and now that currencies are weakening and giving them some concern about funding the current account, it’s perfectly natural that they no longer meet the needs of the policy makers,” said Richard Jerram, chief economist at Bank of Singapore Ltd., who has analyzed Asian economies for two decades. “Their economic concerns have changed, their priorities have changed so the policy changes make sense.”

The Reserve Bank of India sold dollars through six state-run banks to prevent the rupee from dropping to 60 versus the U.S. currency, according to two people familiar with the matter who asked not to be named as the information isn’t public. The government plans to eliminate the cap on foreign-direct investment in telecommunications and raise the limit in defense to lure funds and boost the rupee, two Finance Ministry officials with direct knowledge of the matter said this month.

Indian Caps

Indian Finance Minister Palaniappan Chidambaram said in March a review of foreign-direct investment caps had begun, part of a government push to woo capital, fund a record current-account deficit and revive economic growth. The imbalance in the broadest measure of trade has weighed on the rupee, which plunged to its weakest level on record this week.

Thai Finance Minister Kittiratt Na-Ranong said today the country should use its foreign reserves as a “cushion” to prevent excessive movements in the baht. Sri Lanka’s central bank yesterday said it will relax some foreign exchange regulations.

The temptation for central banks to engage in competitive devaluation is fading as rising Treasury yields diminish the allure of assets in emerging markets, Bank of Israel Governor Stanley Fischer said yesterday. Brazil’s Mantega coined the term “currency war” in 2010, saying his country was the victim of rich nations that were using monetary policy to devalue their currencies and fuel exports.

As speculation increased that the Fed will pare asset purchases, yields on 10-year Treasury bonds reached 2.29 percent on June 11, the highest since April 2012 and up from a record

1.38 percent in July. Wall Street’s biggest bond dealers are telling clients to shift from most fixed-income markets into U.S. stocks amid the worst debt losses since 2011.

JPMorgan Chase & Co.’s Emerging Markets Currency Index has fallen 4 percent in the past month as investors pull money out of developing nation bond funds.

“This kind of volatility is crazy but it reveals the amount of money that people feel might be trapped in fixed-income investments,” Condon said. “People have been warning for the longest time that this is the biggest bubble in the world. Those people look like sages now.”