Red Flag for PKR with Emerging Markets in Focus

After pressure on the Turkish Lira, the Indian Rupee, Mexican Peso, Argentinian peso, Brazilian zeal, and the South African rand, it could only be a matter of time before the Pakistani Rupee succumbs to the kind of sell offs being witnessed in the currencies of these emerging markets.

Although the Pakistani rupee has remained strong this month, the country’s local currency has already borne significant selloffs prior to the election of the new government, in the backdrop of well-known troubles on the macroeconomic front.

With the country posting historic highs in the outgoing fiscal year due to its external account deficits, along with fiscal deficits that were attributed to a meager tax recovery and extensive spending, Pakistani rupee suffered an over 20 percent decline in value since December last year.

Although pressure on the currency was relieved last month with the Pakistani rupee now stable against the dollar, dwindling foreign exchange reserves have prompted the likelihood of resorting to bilateral lenders or multinational institutions like the IMF. Any tough conditions on loans are likely to build back the pressure, as PKR is no more immune to selloffs than other major currencies hit by fallouts on the global stage.

Now with the US-China trade war escalating and traders viewing the likelihood that the US may slap additional tariffs on the Chinese economy, major emerging market currencies have been falling in value, as investors look to fall back on the safer greenback.

This could be a red flag for the Pakistani government and the Central Bank, since emerging markets are often treated as one homogenous group, currencies of which are riskier assets in the eyes of money managers when compared to the US dollar.

The contagion effect can travel to the Pakistani rupee too as China is invested in Pakistan, and major Pakistani companies also form part of the supply chain of Chinese goods in various sectors.

In addition, like India, Pakistan too is highly reliant on oil imports that are priced in dollars, with high oil prices likely to squeeze the rupee, making it less appealing to investors.

India’s rupee hit a record low of 72 to the dollar on Thursday, having fallen steadily by over 10 percent during the year 2018, after starting the year at 63.67. Similarly, the Turkish lira suffered major losses in August, as the diplomatic struggle with US intensified over Turkey’s detention of an American pastor for almost two years on terror-related charges.

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