This week’s events have clearly shown that Mexico and other nations are not immune to the Argentinian and emerging markets currency crisis.
The contagion risks are too big to ignore, although the world has left the 2008 subprime mortgage crash behind, and our country’s incoming government is undertaking positive measures.
Emerging markets sold off anew Tuesday, as South Africa officially entered in recession and Indonesia’s rupiah joined currencies from Argentina to Turkey and Russia in tumbling toward record lows, reinforcing international concerns.
MSCI Inc.’s index of currencies dropped for a fifth time in six days, set for the lowest close in more than a year.
Still engaged in a bitter dispute with the United States over the incarceration of an American pastor that has damaged its economy via sanctions, Turkey saw its lira slid on worry the central bank will disappoint investors at its rate meeting next week.
Meanwhile, the Argentine peso slumped to a record after Monday’s unconvincing message on national television from President Mauricio Macri, and the rupiah sank to the lowest in two decades despite the central bank’s new efforts to protect it.
As U.S. rates rise, investors fears over local risks in developing countries have climbed, including Argentina’s fiscal woes, Turkey’s twin deficits, Brazil’s October general elections, and South Africa’s land-reform bill.
Analysts and currency traders are warning that the combination of global trade tensions, a stabilizing dollar, and prospects of higher U.S. interests rates may ensure emerging markets currencies remain depressed in the short to medium terms.
In the Argentinian case, markets are worried about the combination of excessive austerity measures and insufficient pro-growth structural reforms which could hit the domestic corporate sector with a demand collapse, aggravating the crisis.
That was the story of the South American nation before the government defaulted on USD $93 billion of its sovereign foreign debt in 2001, due to the painful “structural adjustment program” implemented with the International Monetary Fund (IMF) and recently Greece faced a similar situation.
There is no doubt that the recession will erode Macri’s popularity and undermine his prospects of reelection in October 2019; at the same time, this would increase the probability of a former President Cristina Fernández de Kirchner victory, in a moment when she and other Peronista leaders are less inclined to adopt orthodox policies to woo the IMF and foreign investors.
This week, the Clerics in Option for the Poor released a statement in Buenos Aires stressing that the federal government has no one to blame but its own ineptitude, lashing out at the “recessive policies dictated by the IMF and the U.S.”
According to Mexican journalist and independent analyst Antonio Sandoval, the risk of contagion for our country is “big and real,” considering that financial circuits are completely connected in spite of the low bilateral commercial exchange.
“There may be further problems in Argentina and the financial circuits would be exposed. The Argentinian crisis is bad news for Mexico, where the economy has slowed down in recent months and the political factor has not cleared up, although we have a new president,” he expressed.
Sandoval highlighted that the 2008 subprime crisis has been left behind through a series of measures adopted by the U.S. and Europe including interest rates close to zero or below zero, which prevented a global recession.
“In the other hand, the recovery has been weak and different from other episodes, yet we also need to consider what is even worse than a low economic growth”, he said.
The incoming Mexican government, the expert added, is sending some positive signals to the markets with the designation of Carlos Urzúa as Finance Minister, “an orthodox man who will certainly follow the rules.”
Facing the complex global environment and the contagion risk from Argentina, Mexico should maintain the growth and its sound fundamentals next year, bearing in mind, he said, that the economy has to adapt to a new style of governing “and it is not easy.”