Maybe all this recent turmoil in the emerging markets is because of an extradition of clerics issue between the USA and Turkey.
We know that Turkish President Erdogan wants the exiled preacher Fetullah Gulen returned to Turkey because he believes that this 77 year old Muslim cleric tried to topple the Turkish government in July 2016. Gulen lives in Pennsylvania and the US refuses to extradite him.
That is the background story. The current deepening rift between the two NATO allies is over failed talks to release an American pastor who has been detained since 2016 on espionage charges.
Pastor Andrew Brunson
Pastor Andrew Brunson is an evangelical preacher who has lived in Turkey for more two decades where he ran the small Izmir Resurrection Church. He was swept up in a massive dragnet in 2016 and accused of espionage after a military coup failed to topple President Recep Tayyip Erdogan.
Brunson, his supporters and the U.S. government maintain the charges are bogus, and Trump has described Brunson as a hostage. Brunson’s next hearing is Oct. 12. He could face 35 years in prison if convicted.
So while Donald Trump is “making America great again” he is messing around with the rest of the world. And emerging economies like South Africa are getting plunged into all kinds of economic pain because this narcissistic reality show star in the White House is flexing his ego.
“We will not give in… if you come at us with your dollars then we will find other ways to do business.”
— CNN (@CNN) August 13, 2018
Those opposed to the South African government and ruling party are blaming it on President Ramaphosa and other local elements, but this is not the whole story. Emerging markets as a whole are suffering severe blows due to the sell-off of riskier assets by investors.
Emerging Market Currencies Take a Dive
Take today for instance – the Rand has plunged, Mexico’s peso is down, Argentine’s Peso is suffering – all because Turkey ‘s President Recep Tayyip Erdogan is in standoff with the U.S. administration. (Trumps latest tariffs and sanctions against China, Iran, the EU and others, including South Africa are also playing out on the world stage).
South Africa’s rand plunged to a 2-year low against the dollar in early trade on Monday and government bonds weakened sharply as massive falls in the Turkish lira spread to other emerging market currencies.
The rand slid earlier in the day more than 10% to hit a session low of 15.7000 per dollar, its weakest since June 2016.
Turkish Lira Loses 40% of its Value
Investors worry about Turkey sliding into a financial crises and therefore investors are dumping emerging markets across the board. The lira has lost more than 40% of its value this year.
This global Trade War, started as a Spat between Trump and China – it is now escalating to a fully blown Trade war, which the Trump administration dismisses as strategic negotiating tactics to get a fair deal for the United States.
Turkey, a key player in the emerging market sector, is the latest target with US President Donald Trump doubling tariffs on Turkish steel and aluminium imports.
On Friday, the Turkish lira plummeted by more than 18 percent bringing its 2018 losses close to 40 percent. Turkey is now accusing countries – the US being the most obvious subject of discussion – of engaging in economic warfare on the country following a failed coup in 2016.
SA Rand Slumps
Investors were already cautious about emerging markets as the prospect of a global trade war compounded concerns about a more hawkish Federal Reserve and European Central Bank. In South Africa, uncertainty about the ruling party’s policies on land and mining has also contributed to the rand slumping 14 percent against the dollar this year.
While emerging markets all operate individually, they remain interconnected by classification, a sell-off in one emerging market spills over into other emerging market countries that offer liquidity, such as South Africa
According to Bloomberg: “The rand should continue to be influenced by the Turkish lira crisis through the sentiment channel,” Societe Generale SA strategist Jason Daw wrote in a research note. “Until the lira stabilizes, the prospects for the South African currency are not encouraging.”
As an emerging market currency and being in a highly liquid and efficient market, the rand is unfortunately bundled with the rest of the emerging market grouping and emerging markets – being the riskier element – unfortunately bear the brunt as investors seek to protect their investments.
Global Trade Wars?
And just to make this TradeWar scenario more interesting, Russia has announced it will shun the US dollar for trade as the nation joined forces with Turkey in protest of punishing sanctions hiked by Donald Trump.