Photo Credit: AFP/Getty Images/Mustapha Ozer
The U.S. Federal Reserve’s decision not to start to withdraw its stimulus has given beleaguered emerging economies a reprieve. But it is just that — a reprieve. Namely from the pressure on their currencies exerted by the outflows of capital in expectation of diminishing global liquidity as a result of the Fed winding down its asset-buying program. Those outflows in recent weeks have knocked down the value of emerging-market currencies against the U.S. dollar, notably India’s rupee, Indonesia’s rupiah, Brazil’s rial, Turkey’s lira and South Africa’s rand — the “Fragile Five.”
The Fed’s surprise decision on September 18 not to taper has rallied emerging market currencies and stock markets, led by the rupee and the the lira. But it is a rally not a repair. Investors will increasingly shift their attention to the structural weaknesses of economies like India and South Africa, particularly those contributing towards large current-account deficits. As Turkey’s finance minister Mehmet Simsek says, the Fed’s decision will provide only temporary relief and Turkey must press ahead with plans to rebalance its economy. That is just as true for the other four members of the Fragile Five.
