EM currency devaluations no benefit for exports
In the first half of 2015 global trade fell in the worst performance since the first half of 2009 at the height of the financial crisis. Further to World Bank research published in August which showed that devaluations were losing their firepower, this week the Financial Times reported that FT research based on more than 100 emerging market economies (EM) countries showed that "any currency war between developing nations is likely to be even more damaging than previously thought, leading to a reduction in global trade and possibly economic growth, rather than just reapportioning a fixed level of trade between "winners" and "losers."
In effect, competitive devaluations to steal a march on rivals to capture market share don't work. Imports are reduced without any benefit for export volumes.
The FT said that since June 2014, the currencies of Russia, Colombia, Brazil, Turkey, Mexico and Chile have fallen by between 20% and 50% against the dollar, while the Malaysian ringgit and Indonesian rupiah are at their weakest since the Asian financial crisis of 1998.
China, which maintained a strong renminbi firm against the dollar until August let the currency fall 4.5% following a weak July exports report. The FT compared changes in the value of 107 emerging market countries' currencies with their trade volumes in the following year.
The analysis found that having a weaker currency did not lead to any rise in export volumes. However, it did lead to a fall in import volumes of about 0.5% for every 1% a currency depreciated against the dollar. A fall in the value of a country's currency pushes up the price of imports, leading to lower demand for imported goods.
The FT cited Brazilian import volumes which are declining at a pace of 13% year-on-year, according to estimates from Capital Economics, following a 37% collapse in the real. Russia, South Africa and Venezuela have also seen imports fall in the wake of plummeting currencies.
The World Bank research based on a study of 46 developed and emerging economies, found that between 2004 and 2012 currency devaluations were only half as effective in boosting exports as they had been between 1996 and 2003. However it did still find a weaker currency was of some benefit in this regard.
However, the FT research focusing only on emerging markets suggests this advantage has disappeared entirely.
The FT said: "We looked at the movements of 107 emerging market currencies during 2013, 2014 and so far this year. We then mapped that against either real or forecast growth in the volume of exports for the following year, based on data from the International Monetary Fund."
On trade, the CPB Netherlands Bureau of Economic Analysis said last month in its monthly World Trade Monitor that trade dipped 0.5% in Q2 2015 following a revised 1.5% in Q1. There was a 2% rise in the month of June but the CPB economists said that monthly data is volatile.
Pic is of the Petronas Twin Towers in downtown Kuala Lumpur.