Exchange traded funds that track Brazil, South Africa and Turkey could produce another round of headaches as the lingering trade deficits weigh on their economies and currencies.
Brazil, South Africa and Turkey are among the remaining so-called fragile economies if the Federal Reserve decides to tighten its monetary policy, as former members India and Indonesia have enacted enough economic reforms to hold up growth. [Emerging Market ETFs: Keep Watch Over Fragile Three]
Consequently, with falling commodity prices and a strong U.S. dollar, the fragile three’s growing trade deficits could weigh on country-related ETFs, like the iShares MSCI South Africa ETF (NYSEArca: EZA), iShares MSCI Turkey ETF (NYSEArca: TUR) and iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
Brazil, biggest coffee producer, the second largest producer of soybeans, third largest of corn and exporter of oil and iron, is witnessing its current-account deficit distend. The country boasted a 1.9% trade surplus of gross domestic product in April 2005, but by January of this year, Brazil is seeing a deficit of 4.2% of GDP, Bloomberg reports.
“The much lower prices of commodities in international markets (e.g., iron ore and soybeans) explain the bulk of this movement, which implies that exports of basic products should remain weaker than in 2014 for the remainder of the year,” Credit Suisse’s Leonardo Fonseca said in a CustomsToday article. “The month’s figure was also affected by a strong decline in the volume of soybean exports, as 2014 saw an earlier-than-average harvest season. At the same time, manufactured goods also contributed to the decline in exports in the month, probably reflecting the lower absorption of Brazilian products by other Latin American countries.”
Similarly, South Africa, a major metals producer, saw its trade deficit widen to about 4.5% of GDP after a wave of strikes damaged the mining industry and sharp fall in exports. With the current accoutn of balance of payments still under pressure, some observers argue that South Africa is more vulnerable to capital outflows, BusinessDay reports.
While still exposed to potential currency risks and trade deficit, Turkey’s current account deficit was at 4.8 of GDP but fell to a 27-month low in January. Lower domestic demand and greater exports, supported by a weak lira, have helped reduce the deficit. However, as the country relies on oil imports, any changes in oil prices could weigh on the economy.
“We saw around $1.7 billion worth of improvement in Turkey’s foreign trade gap in January from the previous year, mainly due to the decrease in oil prices,” Oyak Investment economist Mehmet Besimoğlu said on Hurriyet Daily News.
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Max Chen contributed to this article.