File image of a currency exchange centre in Istanbul, Turkey | Bloomberg
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The lira’s decline has been a long time coming since Erdogan refuses to hike interest rates.

All it took was new sanctions and a defiant speech.

The Turkish lira’s 24 per cent slump since last Friday is prompting fears of another emerging markets crisis, with developing countries seeing a “sudden stop” in foreign capital inflows once again. On Monday morning, emerging Asia stocks slipped 0.8 per cent, while currencies weakened. Indonesia’s Jakarta Composite Index suffered its biggest intraday fall since 2016.

Asia has been here before, mired in a broad-based financial crisis two decades ago. In 1997, the Indonesian rupiah crashed while the nation’s debt-to-GDP ratio soared to 170 per cent.

But make no mistake. Foreigners have not panicked – and if anything, next to the debacle developing in Turkey, emerging Asia looks as sweet as pumpkin pie.

Lira
No shock to Turkey’s foreign capital flows despite the lira’s depreciation | Bloomberg

A look at Turkey’s foreign capital flow data (released every Thursday) shows that until last week there was little panic, and that foreigners were not the driver behind the lira’s sustained weakness. The currency was down 31 per cent for the year even before Friday’s sell-off.

The lack of action may be because foreigners have long lost their appetite for Turkish assets, despite higher interest rates on offer, according to HSBC Holdings Plc. Like many emerging markets, Turkey saw significant outflows during the 2013 taper tantrum. But since then, foreigners have not returned; Indonesia, by comparison, just kept growing.

Lira

Meanwhile, the volatility of weekly portfolio flows has also declined significantly since 2013. For years, Turkey has been a big yawn for volatility-loving traders. Five years ago, Turkey was the largest constituent in the JP Morgan USD Emerging Markets Index, with 6.6 per cent weight; now, it ranks number 6 with only 3.9 per cent weight, behind Indonesia and the Philippines.

It’s understandable that global investors see more appeal in Asia. While Turkey’s President Recep Tayyip Erdogan continues to rail against higher interest rates, emerging Asian markets with current account deficits – such as Indonesia and the Philippines – are preemptively hiking rates, preparing themselves for further actions from the Federal Reserve.

Asian markets
Global investors have been steadily showing interests in Asian markets

As I argued last week, central banks around the world all prefer to act only on national concerns. But if the U.S. is on a tightening cycle, emerging markets have to follow, however begrudgingly. Indonesia and the Philippines already increased their benchmark rates by a full percentage point this year, and Morgan Stanley is penciling in another 50 basis point hike at the Philippine central bank’s September meeting.

Next to Turkey, both countries have been well-rewarded for their probity. Over the last month of emerging-markets turmoil, in dollar terms, the Jakarta Composite fell only 1 per  cent, while the Philippines Stock Exchange Index rose 3.4 per cent.

“Interest rates are tools of exploitation that make the rich richer and the poor poorer,” said Erdogan. That may be. But when a country’s currency tanks, the entire nation falls from global investors’ radar. Asian economies may be following the path of tough love, but their citizens will thank them in the end. – Bloomberg

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