Global currencies, equities fall as Turkey’s financial crisis looms

Turkish lira sheds 8.31% against dollar, shocking markets in Europe, Asia and South America

by NG MIN SHEN / Graphic by TMR 

Turkey’s looming financial crisis and lira’s worst weekly drop in 17 years dragged global currencies, shook financial markets and sent equity markets across the globe into panic selling.

The Turkish lira shed 8.31% against the greenback yesterday, sending shockwaves across the markets in Europe, Asia and South America. This year alone, the lira has lost almost 80% of its value against the US dollar and became the world’s worst performing currency.

The lira’s drop has dragged currencies in Mexico, South Africa, Brazil, Europe and emerging economies in Asia. India’s rupee fell to a record low yesterday, while Indonesia’s rupiah tumbled as the spectre of contagion looms over a potential global crisis.

The MSCI Emerging Markets (EM) Currency Index fell to its lowest in over a year, declining 1.51% as at 6.41pm yesterday, as the lira plunged for a fourth day on a continued standoff between Turkey’s President Recep Tayyip Erdogan and the US.

The situation worsened as US President Donald Trump doubled US import tariffs on Turkish steel and aluminium last Friday. The lira is also plagued by a current account deficit, high private sector debt levels and large amounts of foreign funding in the banking system.

Apart from the lira, the South African rand fell to its weakest in more than two years yesterday, while the Mexican peso and Asian EM currencies — including the Chinese yuan — slipped as investors raced to safe havens like the US dollar and the Japanese yen. The rupiah dropped almost 1%, Singapore dollar -0.18%, Philippine peso -0.27% and Thai baht -01.6%. The rupiah has lost 7.77% of its value this year against the greenback.

Meanwhile, the ringgit fell to its lowest level since December. As at 6.32pm yesterday, the ringgit was 0.18% lower at RM4.0935.

Malaysia’s key index, the FTSE Bursa Malaysia KLCI (FBM KLCI) fell 22.41 points or 1.24% yesterday to close below the 1,800 level at 1,783.34.

Just last Wednesday, the FBM KLCI — which fell below the psychological 1,700 level in midJune for the first time since March 2017 — broke through 1,800 again with a close of 1,870.73, making a recovery to positive year-to-date after the 14th General Election.

Sunway University’s Business School economics professor Dr Yeah Kim Leng said lira’s decline has given rise to fear of contagion for EMs as they are now facing pressure from all fronts, including high debt levels for certain countries, fiscal imbalances and escalating global trade tensions.

“A full-blown crisis cannot be ruled out, but this is more of a country-specific crisis. A major trigger for a global financial crisis would be a fullscale trade war, which at this junction we’re seeing tension building but it hasn’t shifted to a cliff-like fall,” he told The Malaysian Reserve.

“Financial institutions in advanced economies have built up their buffers after the 2008 global financial crisis and EMs have sufficient resilience in the banking and capital market systems to withstand liquidity tightening, so if there are episodes of capital flight, it should be country-specific,” Yeah added.

ForexTime Ltd global head of currency strategy and market research Jameel Ahmad said EM currencies such as the ringgit and the rupiah are feeling the effect of weaker investor sentiment towards risk, while the Korean won and Singapore dollar are facing pressure from continued strength in the US dollar.

“Asian markets and Asian currencies are likely to remain at threat to more volatility from Turkey risks and prolonged dollar strength story. Global investors now need to consider that the recipe for a currency crisis in Turkey is now presenting a risk of a contagion knock-on effect across other markets,” he said in a note yesterday.

Investors have plenty of risks to monitor currently, with most stemming from geopolitical tensions and political risk, Jameel said.

“This means that we can expect a prolonged mixed sentiment towards global stocks and low attraction towards EM currencies, but a stronger dollar and yen,” Jameel said.

He added that the euro and British pound have suffered from the contagion knock-on effect as European markets are feared to be more exposed to Turkey shocks than as priced in, while traders are seizing any opportunity to sell the pound in light of ongoing Brexit negotiations.

JPMorgan Asset Management in a note yesterday said the lira’s fall could fuel volatility in EM assets while dampening investor sentiment in the near term, as markets are already skittish.

RHB Research Institute Sdn Bhd economist Peck Boon Soon said the ringgit is likely to stay weak in the near-term in light of a stronger US dollar, trade war fears and domestic policy uncertainty.

“The currency may weaken to 4.10 against the US dollar by end-2018 and potentially overshoot on the downside, although it will unlikely be too severe,” he said in a note yesterday.

Equities market were not spared with key indexes falling as Hong Kong sheds 1.5%, Shanghai -0.3%, Tokyo -2%, Singapore -0.8% Seoul -1.5%, Jakarta -3.3%, London -0.5% and Paris -0.3% at press time.