With many emerging market economies already in recession and facing potential financial meltdown, the recent global economic turmoil could not have come at a worse time. Already countries like Mexico, Brazil, Turkey and South Africa have seen their currencies hit all time lows. creating concerns not only that others might follow, but that they may end needing bail outs as well.
U.S About to Tighten the Screw
On top of the recent issues in Europe and Asia, the Federal Reserve is making increasingly loud noises about the possibility that it will raise its key benchmark interest rate. Any change in U.S interest rates sends a shockwave around the globe.
Considering how tightly interlinked the economic performance of China and the U.S is, investors often looked outside, in particular to South America as an alternative high risk investment solution. The problem is that if U.S rates go up as expected, not only does it negatively effects emerging economies who tend to do most of their global transactions in dollars, it also makes those markets less attractive.
Endless Debt Loop
In Brazil the Real has seen its value taking a nose dive as global commodity markets plummet, slashing the value of many of its key exports suck as iron ore and other raw materials. With $188 billion in outstanding debt, Brazil is facing the prospect of its debt reaching junk status. The only solution would be to tighten monetary policy further pushing investors away.
Another example is South Africa that tried to defend its currency through aggressive moves by its central bank which ultimately failed causing further economic harm. Also heavily reliant on commodity exports, it is now facing severe monetary policy changes likely forestalling further foreign investment.
When emerging markets end up in a position where they have only one option, what follows is often even worse as political unrest sets in. Unless the China issue gets resolved soon or the U.S waits to increase interest rates, the global economic turmoil could become truly global.