LAGOS • Just when it looked like things could not get much worse for emerging markets, along comes a trade row. And it is hitting emerging-market commodity suppliers and China-exporter nations especially hard.
Take Thailand and South Africa, which each send about 20 per cent of their goods to China. The Thai baht has just reversed year-to-date gains against the US dollar, while the South African rand, despite a rebound on Wednesday, is still down 1.9 per cent this week, the most among 24 major emerging currencies tracked by Bloomberg, and near a seven-month low.
The pain is evident in raw material prices. The Bloomberg Commodity Index has slumped 4.2 per cent this month, its worst performance since July 2016, while the London Metal Exchange Index was down 5.4 per cent in the four days to Tuesday.
"If the setback for trade is big enough to slow down the global economy, which is likely to be the case, you'd expect commodity prices to decline or no longer rise," said Mr Cristian Maggio, head of emerging-market strategy at TD Securities in London.
Countries closely tied to Beijing through exports of commodities or manufactured goods, such as Russia, and Asian exporters like South Korea are particularly vulnerable, he said.
US President Donald Trump's pledge this week to place tariffs on a further US$200 billion (S$272 billion) of Chinese imports is heaping extra pressure on developing economies at a time when they are already being roiled by the strength of the US dollar and rising US bond yields. The fear is that a trade war would slow growth in China, the biggest consumer of raw materials.
South Korea's won and Russia's rouble are both depreciating for a third week, with the former at its weakest against the US dollar since mid-November last year and the latter close to an 18-month low.
South Korea exports almost one-third of its goods to China, which is also Russia's biggest trading partner, according to data compiled by Bloomberg.
"Small open economies in East Asia, such as Taiwan, Singapore and Malaysia, look most exposed to US tariffs on imports from China due to their role in supply chains," said senior economist William Jackson of Capital Economics in London. "Likewise, Chile, which produces copper used in China's electronics sector, would also be affected."
China buys over half of South Africa's raw-material exports.
"The rand is caught in the crossfire as we have little to offer," said economist Isaah Mhlanga of FirstRand Bank in Johannesburg.
"Growth is weak, the South African Reserve Bank cut rates in March and remains on hold while other emerging-market central banks bolster their attractiveness by hiking rates. This leaves the rand as vulnerable as taking a naked summer swim with jelly fish."
While emerging currencies would have been under pressure in the second half of this year anyway because of monetary tightening by the United States Federal Reserve, the pain will be exacerbated for those nations whose economies stutter if the trade row escalates, according to Societe Generale.
"Emerging-market currencies will depreciate with periodic episodes of stress during the late-cycle Fed tightening phase," said Mr Jason Daw, a SocGen strategist in Singapore. "It will get really bad if the Fed is hiking when growth is slowing."