The devaluation race in emerging markets has just begun

(Bloomberg) — A new round of IMF bailouts is underway, and some of the world’s most indebted countries will have to sacrifice their currencies to get them.

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This year has seen three heavily indebted countries – Egypt, Pakistan and Lebanon – drop their exchange rates to unlock International Monetary Fund support. That might just be the beginning. With at least two dozen countries lined up in front of the Fund for bailouts, currency traders are bracing for a possible new wave of devaluations in the developing world.

Brendan McKenna, strategist at Wells Fargo & Co. in New York, said: “Further devaluation in some fragile border markets is very likely. “When external buffers are exhausted, their latch protection is reduced. Investors with exposure to these markets should think about hedging against devaluation.”

Rising interest rates and a slowing economy have left some emerging markets with unsustainable debt burdens and dollar shortages. Currency fixation and managed exchange rates have become strained, and distortions in countries including Nigeria and Lebanon have led to the adoption of multiple exchange rates.

While weaker currencies can help attract capital and make a country more commercially competitive, it can also bring higher inflation and inflated debt payments. That means investors should beware of exits in countries that may be on the brink, according to Hasnain Malik, strategist at Tellimer in Dubai.

“Currency devaluation makes some equity markets in emerging and smaller countries untouchable,” Malik said, naming Argentina, Egypt, Ghana, Lebanon, Nigeria, Pakistan, Sri Lanka and Zimbabwe.

What Bloomberg Economics Says

“Rising global interest rates and higher commodity prices have left many developing countries subject to fixed exchange rates. Shocks have forced some countries to devalue sharply, others may soon follow. A spike in inflation would result. Political and social stability is at stake.”

—Ziad Daoud, chief emerging markets economist

When China unexpectedly devalued the yuan in August 2015, it led to a global sell-off, erasing $13 trillion from stock market capitalization in six months. Any such reverberation is unlikely this time around, with smaller markets facing significant pressure to weaken their currencies.

Here are some of the countries that investors find most at risk:


Argentina has tried to prevent a sudden devaluation, announcing rules about who can access the dollar, and that has given rise to dozens of overlapping exchange rates. The official rate is 190 pesos, but a dollar costs 373 on the streets of Buenos Aires. The IMF, which has committed $44 billion in funding, has called for the restrictions to be lifted. When asked about the possibility of a devaluation, a central bank spokesman referred to the government’s 2023 budget, which suggests the peso will end the year significantly weaker than the official rate, in at 269 pesos per dollar, but still a long way from the black market rate.


Africa’s largest economy is expected to devalue the naira after elections later this month, with median estimates compiled by Bloomberg suggesting the naira will fall by a fifth. The currency trades at around 755 per dollar in the unofficial market, while the official rate is around 460. Like Argentina, Nigeria applies a variety of exchange rates for different transactions. All three leading presidential candidates pledged to end that. A central bank spokesman did not return calls and text messages on the subject.


Malawi devalued the kwacha by 25% in May to address foreign exchange shortages. Although the difference between the official rate and the initial market rate narrowed, it widened again from September and the currency weakened to a record level on February 8, after the bank The central bank said in January that it would conduct periodic dollar sales. The central bank did not immediately respond to a request for comment.


Ethiopia has pushed back against speculation that it might devalue its currency and has cracked down on the informal market. Birr trades at around 99 per dollar, compared to the official rate of 53.5. The East African country began looking for a deal in 2021 with the IMF, and the lender said in January it was looking for a “constructive and meaningful” commitment with the Ethiopian government. . Debt forgiveness has been hampered by two years of civil war. The central bank did not immediately respond to a request for comment.


Bangladesh announced plans to move to a unified exchange rate with a 2% difference in June. However, the South Asian country, which capped its currency at 107 per dollar, may also need a 26% devaluation, according to Bloomberg Economics. To boost exports and curb imports, the taka will need to fall to 145. A central bank spokesman said he sees no need for devaluation, said analyst Ankur Shukla.

What to see

  • While policymakers in the Philippines are expected to offer another rate hike to anchor inflation expectations next week, they could opt for a less aggressive 25 basis point move. .

  • Bank Indonesia, which has been in a tightening cycle since August, is willing to keep rates unchanged.

  • The People’s Bank of China could leave its one-year rate unchanged but could still reduce it further, according to Bloomberg Economics.

  • Traders will be watching to see if headline inflation in India falls within the Reserve Bank’s 2% to 6% target range.

  • Russia will release fourth-quarter GDP data, with Bloomberg Economics forecasting a 4% year-over-year decline.

  • Argentina’s CPI data will be in focus after the country ends 2022 with inflation at 94.8%, the highest level in more than three decades.

  • A wide range of economic indicators in Colombia – from retail sales to fourth-quarter GDP – are on the calendar.

–With support from Arun Devnath, Sydney Maki, Faseeh Mangi and Patrick Gillespie.

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