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Financial Crisis in Emerging Markets as Turkey, South Africa Raise Rates

Financial Crisis in Emerging Markets as Turkey, South Africa Raise Rates

In the space of about twelve hours, two major emerging market economies, Turkey and South Africa, raised interest rates dramatically in order to attract foreign cash flows and shelter their currencies from an ongoing global crisis in confidence. 

Turkey’s central bank began the interest rate rush by raising its overnight lending rate dramatically, from 7.5% to 12%, reversing a fall in the lira, while South Africa’s Reserve Bank raised interest rates more modestly, from 5.0% to 5.5%, which failed to stop a drop in the rand against the U.S. dollar.

A potential cascade of interest rate hikes may not be enough to stop the currency crisis, and may only fuel a global panic. One of the motivations for the crisis is concern about the slowing Chinese economy, including a potential contraction of Chinese manufacturing capacity. 

Some investors may take advantage of higher interest rates in emerging markets, but many will move assets to more stable countries. The effect on the U.S. economy, which seemed poised for growth, will be mixed, boosting Treasurys but hurting stocks and overall outlook.

Earlier in the week, fears of bank runs were triggered when HSBC limited cash withdrawals in London, a move followed by a Russian bank on Tuesday. Rumors and false stories are also triggering some of the fears in an unsteady environment.

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