A new round of IMF bailouts is underwayand some of the world’s most indebted nations will have to sacrifice their currencies to get them.
So far this year, three indebted countries—Egypt, Pakistan, and Lebanon—have cut their exchange rates to unlock aid from the International Monetary Fund. And this may just be the beginning. With at least two dozen countries queuing up at the Fund for bailout packages, currency traders are bracing for a possible new wave of devaluations in the developing world.
“Es further devaluations are highly likely in some of the fragile frontier marketssays Brendan McKenna, a strategist at Wells Fargo & Co. in New York. “As external buffers are depleted, their ability to defend pegs diminishes. Investors with exposure to these markets should consider hedging once morest devaluation risks.”
The The slowdown in economies has left some emerging and frontier markets with unsustainable debt loads and a shortage of dollars.
The Fund stays until Monday and the Economy goes out to repurchase more bonds
“Border countries made up for their lack of local savings by borrowing abroad when it was cheap, and now they have been hit hard by rising global interest rates,” said Charles Robertson, chief global economist at Renaissance Capital Ltd. in London. .
Now, currency pegs and controlled exchange rates are under pressure, and distortions in countries like Nigeria and Lebanon have led to the adoption of multiple exchange rates.
While a weaker currency can help attract capital and make a country more competitive on trade, it can also lead to increased inflation and higher debt payments. According to Hasnain Malik, a strategist at Tellimer in Dubai, this means investors need to be wary of routing countries that may be on the brink.
“The currency devaluation makes several equity markets in the emerging and smaller frontier universe untouchable”, says Malik, citing the ArgentinaEgypt, Ghana, Lebanon, Nigeria, Pakistan, Sri Lanka and Zimbabwe.
For the IMF, central banks should keep rates high
What Bloomberg Economics Says
“Rising global interest rates and commodity prices have exposed many developing countries with a fixed exchange rate. The shocks have forced some nations to devalue sharply, others might soon follow. The result will be a spike in inflation. Political and social stability is in danger.”
—Ziad Daoud, Chief Emerging Markets Economist
When China surprisingly devalued the yuan in August 2015, it triggered a global selloff, racking up a $13 trillion loss in market capitalization in six months. Similar fallout is unlikely this time around as smaller markets face pressure to significantly weaken their currencies.
Jesús Rodríguez and the “bomb”: “The Argentine economic situation requires moderation and prudence”
Here are some of the countries where parallel exchange rates are weaker than official exchange rates:
Argentina
Argentina has tried to avoid a sudden devaluation, establishing rules regarding who can access dollars and how, which has led to a dozen overlapping exchange rates. The official rate is 190 pesos, but a dollar costs 373 on the streets of Buenos Aires. The IMF, which has committed a $44 billion financing program, has called for restrictions to be removed. When asked regarding the possibility of a devaluation, a spokesman for the Central Bank referred to the government’s budget for 2023, which indicates that the peso will end the year significantly weaker than the official rate, at 269 pesos per dollar, although still very far. the black market kind.
Nigeria
The largest African economy is expected to devalue the naira following this month’s electionsand the median estimate compiled by Bloomberg points to a drop of one-fifth.
“The risk of devaluation of the Nigerian currency is high,” says Ayodeji Dawodu, head of Africa credit and sovereign debt research at Banctrust Investment Bank Ltd in London. “It is very evident in the differential between the official rate and the black market rate.”
The currency trades at regarding 755 to the dollar in the informal market, while the official rate is around 460. Like Argentina, Nigeria operates with multiple exchange rates for different transactions. The three main presidential candidates have promised to end this situation. A central bank spokesman did not respond to a call or text message on the matter.
What irregularities did the AGN detect in the loan that the IMF granted to the Macri government?
Ethiopia
Ethiopia has opposed the speculation regarding a possible devaluation of its currency and has cracked down on the unofficial market. The birr is trading at around 99 to the dollar, compared to the official 53.5. The East African nation began seeking a deal with the IMF in 2021, and the multilateral body said in January it is seeking “constructive and meaningful” engagement with the Ethiopian government. Progress on debt relief has been hampered by two years of civil war. The central bank did not immediately respond to a request for comment.
Ukraine
The IMF held talks with Ukrainian officials on Monday to review the four-month program that, if completed successfully, might unlock a multi-year package of up to $16 billion. kyiv devalued the hryvnia by 20% in July and signed a bridging agreement in December, even as the Russian invasion that had ravaged the economy for a year intensified. The country’s reserves are stable and there are now no grounds for a devaluation, central bank deputy governor Yuriy Heletiy declared in January.
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