Pressure on emerging markets crystalised last week with the sharp sell-off of the Turkish lira, and to a lesser extent the Russian rouble.
Idiosyncratic issues in both countries were responsible for the intensity of the sell-offs, but before these events took hold they were already weakening as part of a broader trend of emerging market vulnerability. While these individual crises will eventually pass, the broader question is whether other EM countries will be exposed to such pressures in the meantime, and what effect this might have on the rest of the world.
Although the Turkish lira has been caught up in a particularly vicious sell-off brought about by persistent economic imbalances and an unfolding political stand-off with the United States. The broader theme of the past few months has been one of a strengthening US dollar caused by expectations of rising US interest rates and hurting emerging market (EM) currencies in particular, especially those with large current account deficits and high external debt. To these were added concerns about protectionism, with the US imposing stiff tariffs on China and threatening them on others, which again triggered falls in other EM currencies. China’s tolerance of a weaker Chinese yuan further accentuated the policy divide, giving rise to more tariffs and heightened tension amidst a rising tide of economic nationalism and fears of a global trade war.
So while the lira was capturing the headlines last week, the fate of many other EM currencies was also looking quite fragile with the JP Morgan EM currency index hitting a record low, and the Russian rouble, the South African rand and the Argentine peso all tumbling. The MSCI EM equity index is also down 17 per cent since the start of this year. Developed economy currencies have not been unscathed either, with sterling revisiting post-Brexit referendum lows, unshielded from dysfunctional Brexit negotiations by the recent rise in UK interest rates. Elsewhere monetary policy divergence is another feature that is exacerbating such trends, undermining the euro and the Japanese yen amidst issues over sub-par growth and challenges over trade.
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The danger now is that regional underperformance in various parts of the world becomes embedded and a source of disruption to the rest of it through sharp swings in capital flows and currencies and potentially movements of people. Markets are clearly becoming alert to these risks, especially the possibility that bigger blocs like China and the EU become infected. Tariffs have unfortunately become an accepted part of the policy armoury in recent months, to which sanctions are now being added, giving credence to some of the claims by Turkey's President Recep Erdogan that a form of "economic warfare" is being conducted.
Usually at times of financial instability and crises, institutions like the IMF can be relied upon to work with the governments in question to come up with policy prescriptions that stabilise investor sentiment and markets. The US Treasury has often also stepped in to help. This time around, however, there are few signs that the sides to the various disputes worldwide want to be reconciled, at least not yet. And in the absence of this, the broader themes of dollar strength and protectionism will continue to play out, exposing fault lines and political differences that could spill over into even bigger and more damaging conflicts and financial market sell-offs. The US appears intent on continuing to pursue policies that will strengthen the dollar and provoke trade tensions, while its opponents show few signs of adopting more conciliatory positions on the key issues of disagreement.
In these circumstances volatility is likely to continue to rise as the perception grows that others could still be affected by tightening financial conditions amid difficult political circumstances, such as Brazil, Argentina, South Africa and Pakistan. History shows that the developed world can also be affected by EM crises, and one of the main conduits through which this could happen remains China, the world’s second largest economy which is seeking to manage a path to slower growth without disrupting a very delicate social balance.
The events of the last week offer a microcosm of what could go wrong on a much bigger scale if such a process becomes unstable, either as a result of domestic policy errors or external provocation.
Tim Fox is chief economist and head of research at Emirates NBD
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Director: Christopher McQuarrie
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COMPANY PROFILE
Name: Kumulus Water
Started: 2021
Founders: Iheb Triki and Mohamed Ali Abid
Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
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UK's plans to cut net migration
Under the UK government’s proposals, migrants will have to spend 10 years in the UK before being able to apply for citizenship.
Skilled worker visas will require a university degree, and there will be tighter restrictions on recruitment for jobs with skills shortages.
But what are described as "high-contributing" individuals such as doctors and nurses could be fast-tracked through the system.
Language requirements will be increased for all immigration routes to ensure a higher level of English.
Rules will also be laid out for adult dependants, meaning they will have to demonstrate a basic understanding of the language.
The plans also call for stricter tests for colleges and universities offering places to foreign students and a reduction in the time graduates can remain in the UK after their studies from two years to 18 months.
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Did you know?
Brunch has been around, is some form or another, for more than a century. The word was first mentioned in print in an 1895 edition of Hunter’s Weekly, after making the rounds among university students in Britain. The article, entitled Brunch: A Plea, argued the case for a later, more sociable weekend meal. “By eliminating the need to get up early on Sunday, brunch would make life brighter for Saturday night carousers. It would promote human happiness in other ways as well,” the piece read. “It is talk-compelling. It puts you in a good temper, it makes you satisfied with yourself and your fellow beings, it sweeps away the worries and cobwebs of the week.” More than 100 years later, author Guy Beringer’s words still ring true, especially in the UAE, where brunches are often used to mark special, sociable occasions.
Company%20Profile
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Key figures in the life of the fort
Sheikh Dhiyab bin Isa (ruled 1761-1793) Built Qasr Al Hosn as a watchtower to guard over the only freshwater well on Abu Dhabi island.
Sheikh Shakhbut bin Dhiyab (ruled 1793-1816) Expanded the tower into a small fort and transferred his ruling place of residence from Liwa Oasis to the fort on the island.
Sheikh Tahnoon bin Shakhbut (ruled 1818-1833) Expanded Qasr Al Hosn further as Abu Dhabi grew from a small village of palm huts to a town of more than 5,000 inhabitants.
Sheikh Khalifa bin Shakhbut (ruled 1833-1845) Repaired and fortified the fort.
Sheikh Saeed bin Tahnoon (ruled 1845-1855) Turned Qasr Al Hosn into a strong two-storied structure.
Sheikh Zayed bin Khalifa (ruled 1855-1909) Expanded Qasr Al Hosn further to reflect the emirate's increasing prominence.
Sheikh Shakhbut bin Sultan (ruled 1928-1966) Renovated and enlarged Qasr Al Hosn, adding a decorative arch and two new villas.
Sheikh Zayed bin Sultan (ruled 1966-2004) Moved the royal residence to Al Manhal palace and kept his diwan at Qasr Al Hosn.
Sources: Jayanti Maitra, www.adach.ae
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Personalities on the Plate: The Lives and Minds of Animals We Eat
Barbara J King, University of Chicago Press
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Lewis Hamilton in 2018
Australia 2nd; Bahrain 3rd; China 4th; Azerbaijan 1st; Spain 1st; Monaco 3rd; Canada 5th; France 1st; Austria DNF; Britain 2nd; Germany 1st; Hungary 1st; Belgium 2nd; Italy 1st; Singapore 1st; Russia 1st; Japan 1st; United States 3rd; Mexico 4th
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SPECS
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There are thousands to choose from, with the five biggest providers BlackRock’s iShares range, Vanguard, State Street Global Advisors SPDR ETFs, Deutsche Bank AWM X-trackers and Invesco PowerShares.