Currencies of Emerging Countries – Expressive Image
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More than 20 countries are queuing up for bailout packages from the International Monetary Fund
In the midst of a new round of bailouts by the International Monetary Fund, some of the world’s most indebted countries will have to sacrifice their currencies to win the bailout.
According to a Bloomberg report, seen by Al Arabiya.net, this year has already witnessed 3 heavily indebted countries – Egypt, Pakistan and Lebanon – lowering their exchange rates in response to the reforms required before obtaining IMF assistance. But experts say it may be just the beginning.
With at least 20 countries queuing up at the IMF for bailout packages, currency traders are bracing for a potential fresh wave of currency devaluations in the developing world.
“Additional devaluations in some fragile developing markets are very likely,” said Brendan McKenna, a strategist at Wells Fargo.
This comes as slowing economies have left some emerging and developing markets suffering from unsustainable debt burdens and dollar shortages.
Charles Robertson, chief global economist at Renaissance Capital, said: “Developing countries made up for the lack of domestic savings by borrowing abroad when it was cheap, and have now been hit hard by the repricing of global interest rates.”
While weaker currencies can help attract capital and make a country more competitive in terms of trade, it can also lead to higher rates of inflation and problems in paying off bloated debts. This means that investors should beware of paths in countries that are likely to be on the brink, according to Hasnain Malik, a strategist at Tellimer in Dubai.
“The devaluation makes a number of equity markets in the emerging and developing world unapproachable,” Malik said, naming Argentina, Egypt, Ghana, Lebanon, Nigeria, Pakistan, Sri Lanka and Zimbabwe.
When China unexpectedly devalued the yuan in August 2015, it triggered a global sell-off, wiping out $13 trillion of stock market capitalization in 6 months. Any such rebounds are unlikely this time around, as smaller markets face pressure to push their currencies to a significantly weaker level.
In turn, emerging markets economist at “Bloomberg Economics”, Ziad Dawood, said: “Rising global interest rates and rising commodity prices have exposed many developing countries to a fixed exchange rate. The shocks have forced some countries to devalue sharply, and others may follow.” “Soon,” he added, “high inflation will threaten political and social stability.”
