Turkey may not be the only country facing a currency crisis given the prospect of higher interest rates in the United States, leading emerging market investor Mark Mobius said on Tuesday.
“Yes, of course it can,” Mobius told CNBC’s “Closing Bell” in response to a question about whether the sharp depreciation seen in the Turkish currency – the lira – could extend to other countries.
“With higher interest rates in the United States, all of these other countries with dollar debt will be affected,” said the investor, who is the founding partner of investment firm Mobius Capital Partners.
The Turkish lira collapsed to an all-time high on Tuesday as the country’s President Recep Tayyip Erdogan defended his central bank’s controversial interest rate cuts amid double-digit inflation.
Mobius did not specify which other countries are vulnerable to a currency crisis. But he said the good news is that since the Asian financial crisis of 1997, many emerging markets have borrowed more in their local currencies.
Risk of monetary crisis
An analysis released last week by investment bank Nomura found that the four emerging markets most at risk from an exchange rate crisis are Egypt, Romania, Turkey and Sri Lanka.
The analysis took into account indicators such as external debt as a percentage of gross domestic product, the ratio of foreign exchange reserves to imports and the stock market index.
“Looking ahead, the prospect of a normalization of the Fed’s monetary policy in the context of a growing economic slowdown in China is not a particularly good combination for [emerging markets]”Nomura said in his report last week.
The US Federal Reserve is expected to start slowing the pace of its asset purchases this month. Most Fed officials have said they will not consider raising rates at least until the cut ends, but markets are looking for a faster timeline for rates, with the initial hike now set. for June 2022.
This has come at a time when emerging markets are facing other challenges such as growing budget and current account deficits, as well as rising food prices, Nomura said.
Mobius’ investment choices
Higher interest rates don’t necessarily mean “a big slowdown” in the markets, Mobius said.
Firms with strong earnings and good margins would still fare well in a rising interest rate environment, the investor said, adding that India and Taiwan were his two preferred markets.
As for Turkey, Mobius said a weaker currency could lead to better exports out of the country.
“The companies we own in Turkey have profits in dollars, in euros. And with a weaker Turkish lira, they are doing better because their costs are much lower,” he said. .
– CNBC’s Natasha Turak, Jeff Cox and Thomas Franck contributed to this report.