2021-08-26-牛津经济研究院-Global_A_framework_for_evaluating_EM_currencies_fair_value_7页_385kb

27 August 2021
Global Research Briefing: A Framework for Evaluating EM Currencies’ Fair Value

Since the March 2020 overshooting event, most emerging market (EM) currencies have yet to recover their “fair value.” Using a panel-based BEER model, fair value estimates are derived by separating misalignments from key economic fundamentals.

Latin America: Political Uncertainty Drives FX Discounts

• Massive political noise, particularly ahead of elections, has deepened FX discounts in Latin America.
• Key examples:
  • Chile: Pronounced misalignment following post-riots capital outflows.
  • Brazil: Institutional erosion since 2008 led to the BRL being among the most undervalued currencies.
  • Colombia & Peru: Sharp discounts tied to political uncertainty and governance concerns.

Amid ongoing fiscal and debt challenges, market consensus leans toward heavy depreciation for most Latin American currencies, though Mexico stands out due to improved current account management.

EMEIA Region: Mixed Fundamentals and Convergence

• Middle East and Asia-Pacific: Thailand and Philippines show alignment with their growth fundamentals.
• South Africa: The ZAR is slightly overvalued, with expectations of moderate convergence.
• Asian Currency Developments:
  • India: Upside bias based on positive productivity growth, though valuation risks warrant caution.
  • Indonesia and Malaysia: Expected appreciation amid improved economic outlooks.

Model Insights and Methodology

• The BEER model captures medium-term misalignments but acknowledges long-term drivers that can persist beyond short-term overshooting.
• Residuals are interpreted as deviations from fundamental equilibrium, with structural shifts and valuation adjustments documented.

Conclusions

• Currency depreciation expectations in Latin America and Asia reflect higher risk premiums due to political and structural factors.
• The BEER framework underscores the challenge of forecasting FX movements, with convergence to “fair value” often taking years.