Cash & Liquidity Management

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Dealing with the Currency Crisis After the currency crises hit the emerging markets in 1997-98 and 2001, there was a period of good, steady results from both income and equity markets, but even before the global crisis took hold in 2008 it was becoming evident that some emerging market economies were experiencing systemic problems. However, the general opinion was that the crisis would be confined to a few developed countries and that the markets in emerging economies would only feel a minimal impact.

Consequently, currencies in emerging markets mostly strengthened before the crisis spread around the world, and those in the main emerging countries rose by an average of 4.8% against their base between the last quarter of 2007 and August 2008. But once trouble became global, emerging markets suffered major problems.

This article, by the Standard Bank of British South Africa, addresses these concerns as well as detailing the special characteristics that can be identified in the currencies of emerging markets in Africa, which frequently prove baffling to European and North American FX dealers. Additionally, the article includes information on why there has been a recent increase of foreign direct investors, and comment upon the resilience of emerging market economies in the face of the financial market turmoil.

Dealing with the Currency Crisis

by Standard Bank

After the currency crises hitting the emerging markets in 1997-98 and 2001, there was a period of good, steady results from both income and equity markets, but even before the global crisis took hold in 2008 it was becoming evident that some emerging market economies were experiencing systemic problems. However, the general opinion was that the crisis would be confined to a few developed countries and that the markets in emerging economies would only feel a minimal impact.

As a result, currencies in emerging markets mostly strengthened before the crisis spread around the world, and those in the main emerging countries rose by an average of 4.8% against their base between the last quarter of 2007 and August 2008. But once trouble became global, emerging markets suffered major problems.

The reasons for this included exposure to bad or ‘toxic’ loan in the banking sectors of most of the developed countries, and the ‘easy’ money of the preceding years which had allowed mounting structural problems in several emerging markets such as Hungary, Ukraine and Argentina. The so-called credit crunch in mature economies saw many investors obliged to liquidate their positions in emerging markets, so that there was a  strong downward pressure on the value of local currencies. As a result of this all emerging market currencies with a flexible exchange rate weakened significantly in the six months following September 2008, although after that most of them began to rise, helped by central bank actions plus fiscal expansion under the aegis of the International Monetary Fund (IMF).

African currencies

The currencies of emerging markets in Africa have long been known to have their own special characteristics, which frequently prove baffling to other FX  dealers, particularly in North America and Europe. One of the leading operators in the region, South Africa’s Standard Bank, recognises that they have significant differences from the more recognisable G7 currency pairs, with a tendency to be considerably more volatile. The nominal CFA franc zone, the common currency of several countries in western and central Africa, swung wildly in the last months of 2008, depreciating overall by around 15% against the U.S. dollar. The South African rand was particularly affected  in October of that year, as investors sold off assets that they judged to be risky, although in fact the country had hardly  any exposure  to toxic assets, but the currency recovered sharply in the second quarter of 2009.

The currencies of emerging markets in Africa have long been known to have their own special characteristics.

This rapidly changing scene is the backdrop against which the FX team in the Standard Bank is accustomed to operate, and they are very familiar with the ups and downs of the likes of the Zambian Kwacha, Botswana pula, Kenyan shilling and Ugandan shilling and the other currencies of the region. They are also experienced in trading the rand. The all-round expertise of those working on the spot and derivative desks gives them a competitive edge when  pricing for foreign exchange management, and above all it ensures that clients have access to the liquidity which is vital to successful FX transactions.

Richard de Roos, head of the bank’s FX department, notes that their research now points to a recovery in the region. While corporate FX transactions have slowed owing to lower business activity and newly-tightened lending criteria, the rand’s strength in recent months is highly encouraging, as it provides an improved environment for exporters to hedge and for importers to firm up their foreign commitments. One UK report echoed these sentiments, saying that “We think that emerging market currencies are in the process of reclaiming back the losses suffered in September and October last year, and that they are likely to reclaim all the losses by the end of this year”.

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