On 22 August, the Indian rupee (INR) breached 65 to a US dollar (USD). To be fair, it was an intra-day break with the INR recovering to rise above the rate; but it sent shivers down every spine, and was followed by the next day’s screaming headlines with doomsday prophets speaking of the INR crossing 70.

Simultaneously, a tiny group of commentators tried to soothe sentiments. The finance minister, P. Chidambaram, spoke of how this was affecting every emerging market; that we will see more reforms to overcome the slide; that we shouldn’t panic; and that the INR was bound to recover. As the finance minister and probably the only one in his party to have sleepless nights about the nose-diving rupee, he had to make the right noises. There were a few others, such as Mihir Sharma of the Business Standard who called it “A Pointless Panic” with his basic text being, “Regardless of what you're told, this is not a 'home-grown crisis' — it is a pan-emerging market problem”.

The advocates of a ‘pan-emerging market problem’ are right insofar as all emerging markets but China have been affected. But they are wrong in that some have been hit far more than others. The table accompanying this article shows it quite clearly.

The data are culled from the daily closing exchange rates between 2 July and 22 August 2013. I have arranged the currencies into six groups. The first involve the INR, the Brazilian real and the Indonesian rupiah, which have depreciated the most since 2 July 2013. This is followed by the South African rand. Then the Thai baht. Then come the Philippine and Mexican pesos. Followed by the ruble. And finally the Chinese yuan, which has remained steady.

The point of this table is to underline the fact that three emerging market currencies have slid far more than others — not only from early July, but across each time span given the table. The difference is not marginal. It is significant. Those trading in the foreign currency market seem to believe that while all emerging markets barring China are worrisome, three are clearly children of significant lesser Gods. Why so?

Table: Currencies versus the USD as on 22 August 2013
Depreciated by INR BRL IDR ZAR THB PHP MXN RUB CNY
Last 5 days -4.9% -4.3% -4.6% -3.0% -2.3% -0.8% -2.5% -0.2% -0.2%
Last 10 days -6.0% -7.0% -5.5% -4.6% -2.7% -1.5% -4.1% -0.7% 0.0%
Last 15 days -5.8% -6.1% -5.1% -3.7% -2.1% -1.5% -2.3% -0.1% 0.1%
Last 20 days -8.4% -8.5% -5.0% -5.3% -3.2% -2.1% -3.9% -1.8% 0.2%
From 2 July 2013 -7.8% -8.5% -8.3% -3.7% -3.3% -1.9% -1.3% 0.1% 0.2%
Notes: BRL = Brazilian real. IDR = Indonesian rupiah. ZAR = South African rand. THB = Thai baht. PHP = Philippine peso. MXN = Mexican peso. RUB = Russian ruble. CNY = Chinese yuan. Source: Pacific Exchange Rate Service, University of Vancouver.

Let me hazard a hypothesis. All three are large economies having a few disturbingly common features. The first is inflation. Consumer price inflation for India is running at 9.6%; for Brazil at 6.3%; and for Indonesia at 8.6%. These are high by any yardstick. The second is the fiscal deficit as a share of GDP. For India, the estimated deficit for 2013 is 5.1%; for Brazil it is 3.1%; and for Indonesia it is 2.9%. In India’s case, the additional worry is if the fiscally disastrous Food Security Bill becomes law, for it will certainly bankrupt the exchequer in no uncertain terms. The third is the current account deficit. For India, it is estimated to be running at around 4.5% of GDP for 2013, especially on account of oil imports in a hugely devalued environment. For Brazil it is 3.2%. And for Indonesia, despite coal exports, it is expected to be 2.4%.

Arguably, by these canons, there ought to have been a fourth to accompany the unholy threesome — South Africa. But somehow, while the ZAR has depreciated quite a bit, it hasn’t been as bad as what has befallen the triad.

Therefore, while accepting that emerging market skittishness is across the board, let us recognise that some nations have been hit more than others. So, focus on reforms to get out of the mess — not knee-jerk commands and controls.
 

   
Published: Business World, September 2013