08/07/1998 15:59:46 EMERGING MARKETS-Hong Kong peg raises concerns
By Diane Craft
LONDON, Aug 7 (Reuters) - The latest attack on the Hong Kong dollar has
raised concerns about emerging markets with currency board systems and analysts
said on Friday a number of countries would be in the firing line if authorities
abandoned the peg.
Obvious candidates that would come under attack in a worst case scenario --
a Chinese devaluation and removal or shifting of the Hong Kong dollar peg --
include Argentina, Bulgaria and the Baltics.
But analysts said other countries such as Russia and Brazil also would
"Any time there is a new crisis or a deepening of a crisis, the market looks
around and says what other countries will be influenced by the same factors,"
said David Boren, emerging market strategist at Daiwa Securities in London.
"They did it after the peso crisis and one of the vulnerable countries was
Hungary on account of its current account deficit so they would do the same
thing with all the currency board countries," he said.
"The vulnerability to Argentina under a Hong Kong peg devaluation scenario
is the fact it is also a currency board and on that basis you would also have
pressure on Bulgaria and the Baltics."
Although Hong Kong's Financial Secretary Donald Tsang said the country's
dollar peg to the U.S. dollar would be maintained, analysts said the risk is
such that investors have fled emerging equity and bond markets en masse in
Indeed, constant fears about a devaluation of the Chinese yuan and the Hong
Hong dollar has been an underlying theme in emerging markets, sparking capital
flight in emerging financial markets.
"There is a significant enough risk that it is a deterrent to investment in
the market at the current time and we are seeing that," said Boren.
Those concerns, along with domestic factors, have triggered fears of a
rouble devaluation and sharp drops in Russia's dollar-denominated debt
"If you have a Hong Kong peg devaluation, which will trigger concerns over
renminbi devaluation, then I think the probability of Russian devaluation
increases significantly," said Boren.
Currency concerns among Hong Kong's neighbours this week suggest that
investors are growing ever more wary about the possibility of devaluations.
Standard Chartered said in a research note that the uncertain fate of the
Chinese renminbi remains a constant theme, with the Hong Kong dollar forward
contracts seen as a barometer of the pressure to devalue.
The Hong Kong dollar's six-month foward rate bid was at 2,650 against 2,300
China's yuan closed at 8.2799 to the U.S. dollar after falling as low as
8.2850 and the Singapore dollar slipped to its lowest level since June to 1.75
to the dollar.
Neil Dougall, Latin American economist at Dresdner Kleinwort Benson, said
there would be a strong backlash in Latin America if the Hong Kong dollar peg
"The effect would be in terms of looking at particular currencies that have
come under very close scrutiny, and clearly the Argentine peso would be very
much in the firing line given the similarity with the currency board
But he added: "It's only in a worse case situation where we are talking
about currency contagion ripping right through Latin America and things going
badly wrong in terms of how the second or third stage of the Asian crisis was
handled that would bring the whole house of cards tumbling down," he added.
Under a currency board system, the fundamental requirement is that
international reserves held by the country have to be at least equal to or
higher than the monetary base.
Analysts said a key test in the worst case scenario would be whether
emerging market countries had the political will and resolve to take defensive
measures to ensure currency stability.
Two key defence mechanisms would be that central banks had enough reserves
to meet dollar demand and the ability to keep interest rates high at the expense
of the domestic economy.
Indeed, some said Brazil has already demonstrated it would defend its
currency at all costs rather than risk a maxi-devaluation and a return of
At the height of the Asian crisis last October, Brazil jacked up interest
rates and also tightened fiscally to stave off speculative attacks on the real.
They said Argentina would probably also pull out all stops to ensure
But even still, those currencies would come under speculative attack and
their financial markets would surely suffer further drops if the Hong Kong
dollar peg were abandoned.
"If it goes, that's it for emerging markets for the rest of the year at
least," said Boren.
((London Newsroom, 44 171 542 5110, fax 542 8688, uk.emering