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Keeping Current on Currency: A Year-end Analysis


Currency Fluctuations, a Highlight of 2018

Macroeconomics was one of the most impactful areas affecting global business this year. As seen in recent stock market volatility, the complexity and uncertainty of today have fueled concerns about an upcoming recession.

For this reason, I would like to cap off 2018 with a post detailing what is at stake and how some of the current crises have emerged. In particular, I will focus on currency fluctuations, their causes, and their effects given that this economic problem is international and intricate in scope. This is especially the case in Turkey and Argentina, the two nations arguably hit hardest by foreign exchange issues this year.

I hope the following analysis will be a useful pre-holiday gift as you, the reader, prepare for a successful 2019.

Flashback: Asia in 1997

Before we address the current year, it is important to present the historical backdrop detailing how and why currency crises wreak havoc on investments and multinational economic performance. Therefore, the Asian Financial Crisis of 1997-1998 is a vital case study to outline as a contemporary case of bursting asset bubbles.

The crisis began in Thailand, where the central monetary authorities removed an exchange rate mechanism pegged to the US dollar. This led to significant decreases in the value of currencies across the continent (excluding China, which has had much more stringent currency valuation policies). These countries were in trouble due to depleted national currency reserves caused by speculation, and their initial response was to engage in protectionist measures (namely buying low-risk US treasury bonds).

The situation was ultimately rectified via the post-World War II system of international financial governance. In this case, the International Monetary Fund (IMF) intervened with loans to the affected countries to stabilize currency values and economic output. Consistent with its mission, the IMF ensured long term financial sustainability in these countries through a strict mix of taxation standards, public spending limits, and interest rate requirements.

2001 Similarities: Turkey and Argentina

The two countries most affected by currency fluctuations today - Turkey and Argentina - share some interesting similarities with regards to economic policy in the years following the Asian Financial Crisis. In particular, the year 2001 was impactful for each country and involved international assistance in both places.

In the case of Turkey, the institution of an IMF relief program provided the populist fodder necessary for current President Recep Tayyip Erdogan to attract and gain political power. Turkish economic policy since then has predictably countered the Washington-centered prescriptions of the IMF and has included generous spending financed by enormous lending to sustain the programs necessary to maintain populist political support.

For its part, Argentina experienced a major default and depression in 2001. At the same time, the country suffered under the restrictions of IMF lending, which included painful spending cuts. Before this strategy was embraced by current President Mauricio Macri, Argentina also responded via populist politics as supported in a region (Latin America) historically distrustful of Washington-promoted initiatives.

2018 Crises


In accordance with a classic currency crisis, President Erdogan is doing all he can to keep the flow of capital going towards the populist masses in Turkey. He has resorted to pressuring, criticizing, and interfering with a normally independent central bank in order to maintain low interest rates (and the cheap access to money they sustain). Interestingly, this brand of aggressive populism is consistent with an religious ideology targeting so-called usurious behavior, thus promoting Erdogan’s image as an anti-secular politician. Erdogan has also assumed several monetary powers and endowed much of economic policymaking under his son-in-law.


The predicament facing President Macri today is somewhat perplexing. Under his administration, Argentina has been doing all of the “right” things to address its recent economic crises and isolation (which include a major corruption investigation exposing high debts at major firms). He has appropriately raised interest rates, advocated for significant budget cuts, and appealed to the IMF for substantial loans. It is unfortunate that, with 2019 as a presidential election year, all of these measures are deeply unpopular in the short run, especially given Argentina’s negative historical views towards Washington and Wall Street involvement in its economic affairs.

Other Affected Areas

Most emerging markets have been better able to handle such currency crises after preventative measures were first implemented in Asia post-1997. These include minimizing the use and dependence of pegs to major currencies (primarily the US dollar) and building/maintaining currency reserves to more easily adjust to international market conditions.

That said, Russia, India, and South Africa all experienced decreases in their respective currencies in 2018. South Africa also became a renewed point of concern for international investors, as the falling value of the rand coincided with controversial proposals to redistribute land.

A Harbinger of Global Recession?

How far will these events lead to a worldwide downturn? While this is a complex economic and financial question, for emerging markets, this could very well usher in a new period of low growth and less investment, particularly in light of trade tensions between the US and China and a decline in oil prices.

In terms of the immediate impacts of this currency crisis, I have personally seen business disruptions take shape when connecting with Argentine professional contacts, as one recently told me they cannot upgrade talent because the value of salaries (as denominated in pesos) is too volatile to make workable budget calculations!

As such, it remains to be seen whether these localized recessions in Turkey and Argentina materialize into contagion. The good news is that with a healthy US economy and a record of solid policy responses globally, modern currency crises can be manageable. This is a positive sign moving forward for international businesses as investment across many borders remains possible.

I welcome your thoughts. Please feel free to respond in the comments or to email me at info@wpglobalconsulting.com to discuss further.

William VogtComment