A weaker currency is usually perceived to be good for the economy; exports get a lift as shipments become more competitive abroad while some consumers are weaned away from costly imports to goods produced in-house.
Such a scenario should therefore be music to the ears of policymakers in Malaysia, for instance, where the local currency has been droopy for a while now, amid graft allegations against Prime Minister Najib Razak as well as a rout in commodity markets.
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Except it isn't. Frederic Neumann, Co-head of Asian Economics Research at HSBC, notes that in many emerging markets, a swift depreciation of the currency can actually hurt growth prospects.
Such headwinds typically play out in two ways. Firstly, a rapidly falling exchange rate pushes up local market interest rates as cash flees outside the borders.
Evidence suggests that in periods of excessive stress in currency markets, the amount of capital as a share of economic output that leaves emerging markets is greater than in the case of developed markets. As a result, domestic financial conditions tighten and borrowing costs rise.