Japanese bank Nomura recently warned that seven countries – Egypt, Romania, Sri Lanka, Turkey, the Czech Republic, Pakistan and Hungary – are now at high risk of a currency crisis. While the situation in Sri Lanka and Pakistan is well known, it is interesting to note that Egypt has heavily devalued its currency twice this year and sought bailout from the International Monetary Fund (IMF). Romania is pushing its currency with interventions and Turkey is also facing a currency crisis.
The currency crisis stems from a massive balance of payments deficit that results in massive currency devaluation. Financial institutions and governments struggle to meet debt obligations, and economic crises and inflation ensue. Recessions attributed to the currency crisis have previously broken out in Mexico (1994), Southeast Asia (1997), Russia (1998) and Argentina (1999–2002), and continue in Venezuela (since 2016) and Turkey (since 2018) . Let’s see what happened in these countries.
mexican peso crisis
Just before the 1994 elections in Mexico, the then government began issuing short-term debt instruments in pesos with guaranteed repayment in US dollars to attract foreign investors. However, the assassination of a leading presidential candidate and violent uprisings in several provinces caused political instability and panic among investors.
The Mexican Central Bank began issuing dollar bonds to buy pesos. The declining strength of the peso led to an increase in import demand, resulting in a trade deficit. Under election pressure, Mexico bought its treasury securities to reduce bank reserves, in order to maintain its money supply and avoid rising interest rates.
The central bank finally devalued the peso on December 20, 1994. To discourage the resulting capital flight, it raised interest rates, but the high cost of borrowing further stifled economic growth. With the devalued peso unable to sell new bonds or buy dollars, the Mexican economy experienced a severe recession and inflation of over 50 percent. Many banks collapsed, and widespread poverty and unemployment spread.
The US eventually organized a $50 billion bailout for Mexico in January 1995.
Chain reaction in Southeast Asia
A financial crisis began in Thailand on July 2, 1997, with the collapse of the ‘baht’ by the government due to a shortage of foreign currency and a burden of foreign debt. Rajdhani flight started, a chain reaction started in the neighborhood. Most of Southeast Asia saw depreciating currencies, devaluation of stocks and increase in private debt.
Thailand, Indonesia and South Korea were the most affected by the crisis. Other countries that suffered damage included Laos, Malaysia, the Philippines, Brunei, China, Hong Kong, Singapore, Taiwan, Vietnam and Japan. During the worst of the crisis, the external debt-to-GDP ratio in ASEAN countries exceeded 180 percent.
The IMF launched a $40bn project to stabilize the currencies of Thailand, Indonesia and South Korea. After being in power for 30 years, Indonesia’s President Suharto was forced to step down on May 21, 1998 in the wake of large-scale rioting that followed a sharp price rise caused by a massive devaluation of the rupee.
When an oil crisis saved Russia
The Russian financial crisis began on August 17, 1998, resulting in the Russian government and its central bank devaluing the ruble and defaulting on its debt.
After the breakup of the Soviet Union, Russia had to assist the former Soviet states, and as a result, imported heavily from them. In Russia, foreign loans financed domestic investments. When it was unable to repay those foreign borrowings, there was a wreck devaluation. Russia’s vast amounts of mineral and natural resources allowed it to amass foreign reserves to export, pay off its debts, and then revalue its currency. Much of the recovery was due to the fact that world oil prices had risen sharply during 1999–2000 and that Russia had a large trade surplus at the time.
For Argentina, it was soybeans
The Great Argentine Depression began in 1998 and lasted until 2002. This was caused by the ripple effect of the Russian and Brazilian financial crises, which led to widespread unemployment and riots, the collapse of the government, the country’s default on foreign debt, alternative currencies, and the end of the peso’s fixed exchange rate to the US dollar. The economy shrank by 28 percent, while half of Argentines lived below the poverty line.
However, the devalued peso made Argentine exports cheap and competitive abroad. The high price of soybeans in the international market generated a large amount of foreign exchange (China, for example, became a major buyer of Argentine soy products). The government encouraged credit to businesses, carried out an aggressive tax collection plan and allocated large sums of money to social welfare, but controlled spending in other areas.
devastation in venezuela
Venezuela, whose economy has been largely dependent on the oil trade, is a classic example of the collapse of a communist regime. Former President Hugo Chávez’s ‘Bolivarian Revolution’ nearly destroyed the oil infrastructure and imposed tight currency controls in 2003 to prevent capital flight. This resulted in a sharp drop in oil production and exports and a series of hard currency devaluations.
Unscientific price controls, expropriation of agricultural land and industries, an almost complete ban on access to foreign currency, and other textbook communist policies resulted in severe shortages in Venezuela and massive increases in the prices of all basic goods such as food, water, and medicine. Manufacturers either cut production or closed shop, and many tech firms and auto majors eventually left the country.
Since 2013, the Venezuelan economy has completely collapsed. Inflation reached 5.4 crore percent in 2019! Despite the poverty rate being 90 percent, the country was hit by hyperinflation. A 2022 report estimated that illegal activities in Venezuela account for 21 percent of the country’s GDP. The Venezuelan currency has lost 99 percent of its value five times since 2012, meaning that as of November 2020, it was worth 1 billion times less than it was in August 2012.
crisis in turkey
Since 2018, Turkey has seen a depreciating lira, high inflation, rising borrowing costs and rising loan defaults. The crisis was caused by Turkey’s excessive current account deficit and large amounts of private foreign-currency-denominated debt, in combination with President Recep Tayyip Erdogan’s growing authoritarianism and unorthodox views about interest rate policy.
In addition, the Donald Trump regime raised tariffs on Turkish steel to 50 percent and aluminum to 20 percent. The final nail in the coffin was the reduction in interest rates from 19 per cent to 14 per cent. The lira lost 44 percent of its value in 2021 alone.