Plunge

By Isaac Cohen*
Most emerging market currencies are plunging to levels not seen in almost six years, as a result of two factors. First, a downturn in commodity prices due to lesser demand caused by the slowdown of the Chinese economy. Second, the imminent increase in interest rates in the United States. Last week, the MSCI Emerging Market Currency Index decreased to a level not seen in six years. In New York, the Brazilian real last week approached almost 4 to the US dollar, a severe drop in this year of 33 percent. Forecasts see the real at 4.10 by the end of the year and at 4.35 next year.
For instance, Brazil is the world’s largest producer of sugar and sugar prices dropped last week to US 0.12 cents a pound, from US 0.25 cents a pound in 2012. Almost one third of a total of 300 Brazilian sugar mills are closed and several are having difficulties meeting payments in dollars, to service debts contracted to increase production in the days of high prices.
Foreign capital inflows into Brazilian bonds have decreased from $10 billion in January to an outflow of almost $6 billion between June and August. In September, Standard & Poor’s downgraded Brazilian debt to “junk.” The Institute of International Finance, the global association of the financial industry, estimates capital flows to emerging markets turned negative by $40 billion, between June and August.
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC.