Question 1: “
Funds invested in emerging market debt issued in domestic currencies have experienced five consecutive weeks of outflows, according to funds tracked by EPFR, taking net outflows over the past 12 months to $12bn ………..…….Currencies across emerging markets have plummeted. Brazil’s currency hit its lowest level against the dollar in two decades last year, while South Africa’s rand and the Russian rouble reached a record low earlier this year. (FT, 23/02/2016) As discussed in the statement above, currencies from other emerging markets such as Brazil and Russia have been experiencing bouts of volatility. You are expected to conduct research on the recent currency turmoil and currency crises in Emerging markets and answer the following:
1) Explain the reasons why investors been pulling out their funds from some emerging markets. (10 marks)
2) Evaluate the causes of currency crises. In your answer, you are expected to refer to the empirical literature. (15 marks)
3) Based on your answers to the above; discuss the risk of ‘contagion’ in emerging markets from the recent happenings. (10 marks)
Some sources of information:
Financial Times (23/02/2016) Emerging market bonds hit as foreign investors dump debt http://www.ft.com/cms/s/0/d29a1416-d975-11e5-98fd-06d75973fe09.html#axzz40zjH1rSi
Financial Times (16/12/2014) Emerging markets grapple with Rouble crisis.
http://www.ft.com/cms/s/2ba83ad8-8517-11e4-bb63-%200144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F2ba83ad8-8517-11e4-bb63-%25200144feabdc0.html&_i_referer=&classification=conditional_standard&iab=barrier-app#axzz3Pv1IUQp5
Financial Times (30/01/2014) Emerging markets: Fear of contagion http://www.ft.com/cms/s/0/b201ae8e-89a5-11e3-8829-00144feab7de.html#slide0
Financial Times (29/01/2014) Tropical winds on emerging markets http://www.ft.com/cms/s/0/28f178fa-88e1-11e3-9f48-00144feab7de.html#axzz2sGlXRLY
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