Mexico, Korea and Czech Currencies Gain in Emerging Markets

Investors in these markets are becoming more discerning about where they put their money, shying away from countries such as Brazil, India (SENSEX), Indonesia, Turkey and South Africa.

Mexico, the Czech Republic and South Korea are among the still-attractive countries because they are less reliant on foreign finance or took advantage of easy money from Fed stimulus to strengthen their economies.

Fed Signals

Since the start of May - the month the Fed signaled it may consider paring its $85 billion in monthly bond purchases - the Indonesian rupiah has fallen 11 percent against the dollar and the Indian rupee declined 12 percent, with the Turkish lira dropping 9 percent and Brazilian real losing 8 percent. By contrast, the Mexican peso has lost 5 percent, the South Korean won has risen 3.8 percent and the Czech koruna climbed 3.5 percent.

The worst may not be over, if the past is any guide. The Brazilian real lost 51 percent in 2001-02, the Indonesian rupiah plunged 86 percent in 1997-98 and India’s rupee fell 42 percent during 1990-92. In 2000-01, the Turkish lira declined 68 percent and the South African rand depreciated 52 percent.

Investment Opportunities

Investors are taking a closer look as the Washington-based Institute of International Finance predicts that private capital flows into emerging markets will fall $153 billion to $1.1 trillion in 2013 and slide another $33 billion next year.

Previously, China’s double-digit expansion prompted investors to bet it would serve as a magnet for the products and commodities of other emerging markets, he said. In addition, a low-interest-rate environment in developed countries led capital to seek higher returns elsewhere, masking or even encouraging fault-lines such as widening current-account deficits, weak productivity, a small share of investment relative to domestic consumption and delays in infrastructure improvements.

Brazil Slump

Brazil has suffered a slump in the real after relying on credit-led consumption, which failed to boost productivity and returned the country’s current account to a deficit of about 3 percent of gross domestic product.

Indonesia is hampered by inflation close to a four-year high and a record current-account shortfall. India is held back by cooling growth, elevated inflation, inadequate roads and other infrastructure, and distorted regulations. Standard & Poor’s in September reiterated it may downgrade the country’s credit rating to junk on risks including budget and current-account imbalances.

Turkey and South Africa now have current-account gaps bigger than 6 percent of GDP. Russia is hobbled by weaker global demand for its exports of oil, natural gas and metals and is growing at the slowest pace since a 2009 contraction.

The Czech Republic, South Korea and Mexico are among nations that look better positioned to accommodate Fed-inspired higher interest rates, according to Goldman Sachs Group Inc. economists last month. Mexico’s current-account shortfall is 1 percent of GDP, and South Korea enjoys a surplus, which the Bank of Korea forecasts will reach a record this year as the country benefits from its drive toward export diversification.

It’s not all bad news. The Fed’s decision not to taper in September has given emerging markets more space to put their houses in order. Following Vice Chairman Janet Yellen’s nomination to replace Chairman Ben S. Bernanke, officials from South Korea to India expressed hope the central bank will consider the ripple effects when it pares stimulus.

Colombia is prepared for more differentiation, Finance Minister Mauricio Cardenas said in an interview. The country is “one of the best of the class,” he said, because of accelerating growth, contained inflation, a recent overhaul of payroll taxes and a current-account gap that is more than covered by foreign direct investment.