The Looming of Emerging Market Crisis?
Yopie Hidayat (Contributor)
LISTEN to the pounding alarms from gold price. In financial markets, gold is more than just an investment instrument. This precious metal can also be a leading indicator for an impending crisis. When other financial assets are in distress, gold often becomes the safe haven. So when gold prices are rising quickly, that’s a sign that investors need to watch very seriously.
Since the start of the year, gold prices have soared by more than 35 percent, going to US$2,066 per troy ounce as of Friday, 7 August. This is the fastest price rise in the last four decades. And, it looks like the trend will continue for quite some times. Bank of America Corp. estimates that it is feasible to see a US$3,000 gold price in the next 18 months.
This prediction is reasonable, considering that the culprit behind higher gold prices is the Covid-19 pandemic. Until now, it has not stopped afflicting nearly every economy in the world. Good news about a vaccine that is entering test phase is still unable to drive market optimism.
As the pandemic continues, it has become clear that the global economic damage is truly severe. Except for China’s economy which has started rolling again, there is little chance of quick recovery in various economies that have been put into a slump due to the pandemic. Government efforts in many countries, including injecting the economy with plenty of liquidity, seem futile. And in attempts to salvage the economy, budget deficits and government debt are swelling out of control everywhere.
The flood of liquidity has already started creating a troublesome short-term consequence, which has also happened in the United States. The interest and yield on real bonds in the US are practically negative now. In normal conditions, low interest and cheap borrowing cost should push economic activity into higher gears. However, this crisis is not just about the economy. The pandemic has made people uncomfortable with normal activities. How is an economy supposed to move quickly when a virus is running amok and physical interactions are limited? At least one big chunk of the economy’s productivity is gone due to fear of the pandemic.
While the economy is still not performing, expectations of inflation are actually rising. This is the scenario of the frightening stagflation. The deluge of new dollars from the Federal Reserve has triggered inflation while failing to move the economy. The anticipation for this worst outcome has slowly chipped away at the US dollar. That is reflected in the Dollar Index, which measures the US dollar against six currencies from developed economies.
Since reaching its highest point on March 20, the Dollar Index has lost nearly 10 percent by the first weekend of August.
Unfortunately, the fall of the dollar has no positive effects on Indonesia. In fact, the rupiah has kept falling against the dollar since 3 June, when the price of one US dollar was only Rp13,878. Up until August 7, the rupiah has continued its downward trend, reaching Rp14,625 per US dollar. The weaker rupiah is surely related into Indonesia’s worsening economic performance. In the period between July 2019 to end of June 2020, Indonesia’s economy has contracted 5.32 percent. This is the worst economic contraction since the 1998 crisis.
There is another threathening matter. Indonesia is suffering collateral damage from a problem that’s affecting Turkey, its fellow emerging market. The Turkish lira has dropped to 7.23 per US dollar at the time of print, August 7. Counted from the start of the year, the Turkish lira has fallen by 21.4 percent. If this problem is not answered soon, the poor economic management that let the Turkish lira collapse can trigger a new emerging market crisis that will start while a global crisis is still brewing.
The problem is crises in emerging markets are like Covid-19. They easily spread to one country to another, even when their conditions are far different. Just a reminder, that was what brought Indonesia down in 1998 Asian financial crisis.