Turkey may not be the only country facing a currency crisis given the prospect of higher interest rates in the United States, 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 weakening seen in the Turkish currency – the lira – could spread to other countries.
“With higher interest rates in the US, all these other countries that have debt in dollars will be affected,”[ads1]; said the investor, who is the founder of the investment company Mobius Capital Partners.
The Turkish lira crashed to a record low on Tuesday as President Recep Tayyip Erdogan defended his central bank’s continued controversial interest rate cuts amid rising 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 in 1997, many emerging markets have borrowed more in their local currencies.
Risk of currency crisis
An analysis published last week by the investment bank Nomura found that the four emerging markets most exposed to an exchange rate crisis are Egypt, Romania, Turkey and Sri Lanka.
The analysis addressed indicators such as external debt as a percentage of gross domestic product, the ratio between foreign exchange reserves and imports and the stock market index.
“Looking ahead, the prospect of the Fed normalizing monetary policy in the midst of China’s ever-deepening economic downturn is not a particularly good combination for [emerging markets]”, Nomura said in its report last week.
The US Federal Reserve will begin to slow down its asset purchases this month. Most Fed officials have said they will not consider raising interest rates at least before the slowdown subsides, but markets have been looking for a faster timeline for interest rates, with the first increase now priced in for June 2022.
It has come at a time when emerging markets are confronted with other challenges such as increasing financial and current account deficits, as well as rising food prices, Nomura said.
Mobius’ investment choice
Higher interest rates do not necessarily mean “a big decline” in the markets, Mobius said.
Companies with strong earnings and good margins will continue to do well in an environment of rising interest rates, said the investor, adding that India and Taiwan are his two preferred markets.
As for Turkey, Mobius said that a weaker currency could lead to better exports out of the country.
“The companies we own in Turkey have earnings in dollars, in euros. And with a lower and weaker Turkish lira, they do better because their costs are much lower,” he said.
– CNBC’s Natasha Turak, Jeff Cox and Thomas Franck contributed to this report.