A rare earth

Avid readers of the financial press may already be familiar with the rare earth (commodities) and their oxides, used by manufacturers of turbines and cars. To cut to the chase, the rare and most precious commodity is stability. Maybe it may be a far-reaching analogy, but it works fine. If you would like to have a look to foreign exchange rates in a five-year perspective, you may also find your answers by yourselves. Whether in the emerging markets universe or developed markets, the investment climate relies heavily on stability.

Have a look at the Turkish lira against major currencies. There was a brief period of stability when market expectations changed from pricing in immediate rate cuts by the newly-appointed Central Bank Governor to, perhaps, some months of unchanged interest rates. The new weakness of the lira is in line with broader emerging markets FX trends in recent days – but any depreciation of the lira is always significant because FX pass-through is such a crucial element of high inflation in Turkey; and any seemingly harmless move can complicate matters.

A recent report from credit ratings firm Moody’s clearly hit on the issues. “A weakening currency and high inflation will continue to erode the confidence of domestic depositors, prompting already-high deposit dollarization of 54% of total deposits as of February 2021 to increase further. Ultimately, the lira depreciation will dampen portfolio and investment inflows and increases the tail-risk scenario of capital controls resulting from government policies.” Let’s hope that a rare earth find may help the Turkish economy.


New COVID-19 cases have surged in the emerging world, with India, Emerging Europe and Latin America particularly hard hit. Social distancing measures have been tightened in many countries, which will weigh on activity.

The early evidence suggests that the EM recovery had already lost some momentum in Q1 and that’s likely to continue into Q2. Indeed, high frequency data suggest that mobility has edged down in those countries that are worst affected. Growing headwinds to the economic outlook add to reasons to think that most EM central banks will look through the coming spike in inflation.

Output and activity suggest that the EM recovery started to lose momentum in the first quarter. Consumer spending held up reasonably well in February, particularly in Latin America and Emerging Europe. But business indicators show that growth in industrial sectors started to weaken. •ur measure of aggregate EM inflation jumped from 3.1% in February to 3.5% last month, which was almost entirely due to higher energy inflation.

William Jackson, economist, Capital Economics, April 21

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