Currency crisis redux?

Harrowing but unsurprising news for two of the hardest hit emerging markets in recent years.

According to Evghenia Sleptsova and her team at Oxford Economics, Argentina's peso and the Turkish lira are the two currencies most vulnerable to yet another sell-off. Sleptsova calculates a 70 per cent chance of a currency crisis in the next three years in Turkey, and about the same for Argentina over the same period.

Here's her chart of the currency risk rankings across emerging markets, with Ukraine, South Africa and Russia rounding out the top five:

The dire prognosis comes despite major economic adjustments in both countries. Last year the peso and lira fell off a cliff with the currencies losing half and a third of their values against the dollar respectively.

In Argentina, policymakers have engineered a debilitating recession and helped to simulatenously close the country's twin fiscal and trade deficits through ultra-tight monetary policy and austerity. In Turkey, the current account deficit continues to narrow to roughly $13.4bn on a 12-month rolling basis — the lowest in ten years.

However risks remain in both countries which threaten to bring about a fresh bout of volatility, and what Sleptova calls twin or triple whammies of sovereign and/or banking crises. Here's her summary of the current state of affairs in Turkey:

The government’s reluctance to accept a lower pace of growth, the central bank’s severely dented credibility and the opacity surrounding FX reserve losses have proven damaging for confidence, both domestically and among foreign investors, and may be storing up bigger trouble for TRY down the road.

Investors are still reeling from reports that Turkey's central bank boosted its short-term dollar borrowing in order to increase its stock of official foreign reserves. Turkish citizens have also borrowed heavily since last summer's crisis, and with the country's longest-serving leader questioning the results of a democratic election his party lost in March, there is no shortage of reasons for the lira to once-again nosedive.

The situation in Argentina is equally precarious despite the backing of a $56bn IMF programme, the largest in the institution's history. Few believe the government's new rule to intervene in the currency whenever it sees fit will help to break the cycle between peso depreciation and spiralling consumer prices, which has led to inflation nearing 55 per cent.

Even if the rule change were to work and the move by Macri's government to freeze prices on certain goods were to win over distressed voters, October's presidential election, which could see the return of former leftist president Cristina Fernández de Kirchner, has markets on edge.

As the peso has lost an additional 17 per cent of its value against the dollar this year, and the lira 14 per cent, there's the question of just how much more room both currencies have to fall considering last year's destruction.

Remember the 90s? It could be a lot further than you think.

Related Links:
Argentina's problems don't end with its election — FT Alphaville
Argentina is on the brink — FT AlphavilleTurkey needs a better PowerPoint — FT Alphaville