Developing countries to face major liquidity problem

Baku. 4 October. REPORT.AZ/ Emerging market including Russia, Brazil, Turkey and South Africa are going to face serious liquidity problems.

Analytical Group of Report News Agency informs, the reason for liquidity problem in these countries is a factor of decreasing interest in "carry trade" transactions.

Notably, a currency carry trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

At present, the emerging markets are approaching the escape period of foreign investors. For example, in Russia over the last two years the rate of dollar has fallen from 86 to 58 rubles, i.e. 33%. Foreign investors have actually gained 67% in Russia over 2 years.

At present, there is almost no meaning of staying in emerging markets. The currencies of these countries have grown to a maximum and the interest rates have fallen to a minimum. After all, these countries are likely to have a negative trend. In these countries investors can lose their interest rate earnings at any moment in exchange difference. Instead, the discount rate grows in U.S.

In December, the US Federal Reserve System (Fed) is expected to raise interest rates by 1.5% and 2.5% for the next year. Foreign investors are going to shift gradually from emerging markets to developing markets. This will lead to liquidity problems in developing countries.

At the same time, these countries will be forced to borrow foreign currency at a higher rate, to protect their currency, fulfill their obligations, and cover the budget deficit. As a result, foreign debt will grow even further.

As a result of the capital inflow, the sharp decline in the currencies of those countries will be inevitable.