Introduction
Let's begin by looking at what has happened in EM currency recently via a set of charts. Everything began with the Turkish Lira in early August.
Turkish Lira
Argentine Peso
Source: Bloomberg
Both countries have experienced nearly 50% currency devaluations this year. This means that all import prices have essentially doubled - whether oil, metals, other commodities or finished goods.
What these two countries have in common are large current account deficits: a large amount of borrowing financed by dollar (or Euro) denominated loans, as well as lesser in-flows of FDI (foreign direct investment) and hot-money equity capital. Of these flows, FDI is usually the good kind of investment, as it is usually used for productive investments chosen by the owners of that capital, and it is usually patient, long-term capital. Loans can be in this category, but due to the global hunt for yield that has occurred since the end of the financial crisis, many articles have pointed out that lenders have become less picky about covenants and who they are lending to. USD or EUR denominated loans in particular are quite problematic leading into crises because the income by which they are serviced comes in the local currency while the obligations are in a different currency. In a long period of stable exchange rates, they can be useful, leading to lower borrowing rates than are available in local debt markets, but when these periods end, they inevitably lead to elevated default rates and severe recessions.
Knowing this connection between current account deficits and currency crises, what can we expect to see if we look at currencies with slightly less bad deficits? The next three charts look at Russia, Brazil and South Africa.
Russian Ruble
Brazilian Real
South African Rand
Source: Bloomberg
While none of these countries has
