'Brasil: País do futuro', meaning Brazil: country of the future, was the much-bandied slogan when my family moved there in the 1960s. In the 50-odd years since it’s moved up a notch from ‘third world’ to ‘emerging market’; really, or are we merely dealing in semantics? With 17 candidates currently standing for October’s presidential election, anything might happen. Running for a third time is ex-senator and environment minister Marina Silva, who is exactly my age.
Our lives couldn’t be more different. One of 11 children of an Amazon rubber tapper, she was illiterate until the age of 16. The skinny, ex-(PT) Workers Party member in a recent Financial Times Special Report noted: "I know what it is to get malaria five times, hepatitis three times, and leishmaniosis. I know what it is like to work as a maid and a seamstress. I am the politician who has lived the fragility of the fragile people."
Which is the point: emerging countries and their markets are fragile. They have neither the depth nor infrastructure, cash and institutions to weather storms. Some have been hit this year, for myriad reasons, including President Trump’s about turns. The currency gets hit first (in a floating exchange rate regime) and is the canary in the coal mine. Next, they sell bonds – and ask questions later. Finally shares might be dumped, although they do offer some protection against inflation so locals may buy. Finally, some attempt to offload real estate.
We are nowhere near this point but we’ll look at some weaker currencies today, keeping in mind it’s against a background of recent US dollar strength. The Brazilian real has weakened from 3.10 to 3.80 to the greenback this year, elections looming large. A 22 per cent devaluation in a matter of months is scary, but something we’ve seen myriad times over the past 30 years. Not as weak as when President Lula was first elected in 2003 (when it hit 4.00), nor 2015’s record 4.25. But moving in that direction.
The Indian rupee also tends to motor along a one-way street, interspersed with bouts of consolidation that lull one into a sense of normality and first world aspirations. From 63.25 to 68.15 rupees per US dollar since January, it’s probably time to take out its weakest ever level at 68.80 (2013 and 2016) and tumble towards a measured target between 75.00 and 78.80.
The Indonesian rupiah has weakened for four consecutive months, prompting Bank Indonesia last week to increase its key seven-day reverse repo rate from a record low 4.25 per cent to 4.5 per cent. On other measures the country’s doing well, with Q1 2018 GDP skipping along at 5.06 per cent and CPI inflation an acceptable 3.4 per cent annualised. Despite the above we feel that, like India, it’s set to test 2015’s weak point at 14,730. Note that during the Asia crisis of 1997-98 it reached a rather worrying 16,800 – from a starting point at 2,500. Now, that’s a crisis!
Finally, we look at the South African rand, which has tended to move in wild swings in the post-apartheid era. Strengthening from its weakest ever 17.5 rand per dollar in 2016, to 11.5 early this year, it looks set to mirror other emerging markets currencies albeit at a slower pace. As they say: there’s nothing new under the sun.
