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ECONOMYNEXT – Sri Lanka’s interest rates should go down, but the rupee will not fall, because the strength of the currency is based on confidence, not just rates, Mark Mobius, an emerging market investor said in a prediction.
“You have to reduce the interest rates,” Mobius, known as a emerging market guru, said at a forum in Colombo organized by Cinnamon Life, an 800 million US dollar real estate development promoted by Sri Lanka’s John Keells Holdings.
“You have to look at the global situation. Interest rates are moving down and are low.”
He said some people said that if rates are lowered the currency will fall.
“No, the currency is based on confidence not only on interest rates,” he said. “Look at the US.”
The US however no longer has pegged exchange and is a free floating currency and the Fed does not inject base money (or withdraw) on interventions in the foreign exchange market.
The US dollar also collapsed in 1971 when the Fed injected money while trying to maintain a gold peg at 35 dollars an ounce.
Mobius’ comments came a day after Paul Volcker, the Fed Chairman who ended the stagflation created by the Fed after the gold peg collapsed, died. Volker raised policy rates to 20 percent to end 14 percent inflation, sending oil and gold prices crashing down.
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Currency crises are faced by soft-pegs, which collect foreign reserves by intervening in forex markets, not free floating regimes.
Currency boards or hard pegs (where short term rates float) also do not face currency crises and ‘foreign exchange shortages’.
No Forex Reserves
However in an about turn, Mobius himself admitted that he looked at forex reserves when investing in emerging markets.
Central banks of countries like the US did not have foreign reserves and most gold and forex reserves were owned by emerging market countries, he said.
He said at one time he could not exit from Nigeria. Nigeria is an oil producing country with a bad central bank.
Mobius said he was told that there were no foreign exchange reserves and he was told to wait and he had to wait.
The Nigerian currency the Naira was set up with a central bank in 1972, replacing the pound at 0.6 to the US and it has fallen to about 360 so far.
The soft-peg with the US dollar operated by Sri Lanka’s central bank has the worst record among South Asian monetary authorities, falling from 4.70 to 182 since it was created in 1952.
The central bank’s soft-peg has dragged the country and the Treasury to the IMF 16 times so far.
Pakistan is next the next worst central bank with the rupee falling to 155 from 4.70 to the US dollar. Bangladesh is next, but has kept monetary stability for almost a decade with the Taka at around 80 to the US dollar, giving a stable foundation for a period of strong growth.
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The best performer is the Maldives Monetary Authority, whose dollar peg has fallen to only 15.
Dubai which also had Indian rupees now has a currency which is 3 to the US dollar, and has no independent monetary policy, with a currency-board like system. (Colombo/Dec10/2019 – Update III)