Ye Xie and Andrea Wong New York

Inflation-adjusted interest rates are still too low in developing nations for Citigroup and Goldman Sachs to foresee an end to the worst emerging market currency sell-off in five years.

One-year borrowing costs in Turkey are 3.6 percent, less than half of the average in the three years before the 2008 global financial crisis, even after the central bank doubled its benchmark rate last week. The real yield for Mexico is almost zero, while South Africa’s is 1.4 percent, compared with an average of 2 percent over the past decade.

Central bank rate increases in Turkey, India and South Africa last week failed to contain last month’s 3 percent sell-off in emerging-market currencies. Citigroup says yields are not high enough to attract the capital needed to finance current-account deficits in some of those nations.

Competition for capital is intensifying with the Federal Reserve paring monetary stimulus, while the International Monetary Fund is calling for “urgent policy action”.

“When you have low real rates and try to finance your current account deficits, it usually won’t work,” Dirk Willer, a Latin America strategist at Citigroup, the second-largest currency trader, said on Friday. “If the US is repricing for higher rates, it’s very difficult for you to get away with lower rates. South Africa and Turkey are not safe yet.”

Global funds pulled $6.3 billion (R70bn) from emerging market stocks in the week up to last Wednesday, the biggest outflow since August 2011, according to Barclays, citing data from EPFR Global. More than $12bn has fled the funds this year, already approaching last year’s outflow of $15bn.

One-year real yields in developing economies, based on the difference between interest-rate swaps and consumer price inflation, are about 1 percent, according to Goldman Sachs. While rising, the rates are lower than the average of about 2 percent from 2004 to last year, a model at the New York-based bank shows.

Turkey’s real yields may come under further pressure after a report showed yesterday that the nation’s annual consumer inflation accelerated to a faster-than-anticipated 7.48 percent last month, from 7.4 percent in December.

“If policymakers don’t respond appropriately to signals from the market, and very few in emerging markets have done so convincingly so far, then asset prices continue to pressure the economy directly,” Morgan Stanley economists Manoj Pradhan and Patryk Drozdzik said in a client report on Wednesday. – Bloomberg