Trade war shaping up to be a major risk to emerging markets
Fund investors’ shift to ‘safe havens’ is detrimental to emerging-market currencies such as the rand, says FXTM expert Jameel Ahmad
The ongoing US-China trade war could be the biggest risk to global financial markets since the global economic crisis, says Jameel Ahmad, global head of currency strategy and market research at foreign exchange broker FXTM.
The trade tensions have fuelled pessimism about the global economy, with fund investors fleeing so-called risky assets in favour of “safe havens” such as gold. The move, according to Ahmad, is detrimental to emerging-market currencies such as the rand.
FXTM, which has its headquarters in Cyprus and offices in China, India, Indonesia, Malaysia, Nigeria, SA, South Korea and Thailand, provides international brokerage services.
“The trade wars are a massive negative for emerging markets because emerging markets are so reliant on trade. The probable weakening in global trade is the biggest risk facing emerging markets right now. Its bad news, especially for an economy in a recession like SA’s,” he said on Tuesday.
He said the tense relations between the US and China had triggered currency volatility, with emerging currencies, except for the Mexican peso, weakening against the US dollar this year. “It is not a coincidence. It is because investors do not want to take on risk. There is a lot of risk aversion in the market. The rand has been hit by this as well,” Ahmad said.
In the year to date, the rand has weakened by more than 15% against the US dollar. “It is not isolated. It is a story of emerging markets this year,” Ahmad said.
For the first time in more than two years, the IMF cut its forecast for global growth earlier this month and cited growing tensions between the US and its trading partners, which it said would hurt global economic activity. In its World Economic Outlook report, the IMF cut its forecast by 0.2 percentage points to 3.7%.
“They made even more concerning comments that global growth could be flattening and that this could be the peak for global growth. They said the trade tensions are a serious risk. The most recent statements from the US and Beijing suggest that they expect these tensions to get worse before they become better,” Ahmad said.
In order to counter the negative effect of weaker global trade, the SA economy should be domestically reliant. “SA is sensitive to emerging-markets risks. That is not going to change. The rand is one of the heavily traded emerging-markets currencies. That is not going to change. But the [SA] central bank could consider cutting interest rates,” he said.
Tutwa Consulting senior economist Heinrich Krogman on Tuesday said the US-China trade war could lead to trade diversion, with Chinese goods that would ordinarily be exported to the US being diverted to other markets. “These new markets will include emerging markets. Secondly, the stand-off could lead to trade creation, whereby manufacturers from other countries will get a chance to penetrate the US market,” Krogman said.