"You сhoose travel destination as financial Guru"... Floating around the Internet you could find a lot of guides how to plan your next vacation, useful travel hacks and tips how to spend the holiday of a lifetime. Of course it could be helpful. But I want to propose alternate approach for choosing your travel destination. Let’s assume that you get wages in United States dollars, have an idea of what factors affect the exchange rates, as well as don’t want to spend plenty of money on vacation. In that case I would like to bring up to speed on how to choose your travel destination taking account of the currency depreciation versus United States dollars. I chose the following countries for your next trip: Argentina, Turkey, Brazil and Russia. So let’s talk about these countries and forecast the trend of their currency exchange rates.
Argentine Peso is the leader of the depreciation among the countries I’m recommending for visiting. Over the past year, the peso has lost 54% of its value against the US dollar. And most likely this trend will continue, due to large fiscal and current-account deficits, as well as non-diversified economy of the country.
The economy of Argentina is highly dependent on agro-industry (approximately 11% of GDP). A heavy drought in May-June led to sharp drop in agriculture production, which negatively affected the economy of the country. Of course drought is one-time effect, but this case shows us that the economy of Argentina is still not sufficiently diversified and could face with the similar problems in the future. Anyway I expect further slowdown in economic growth of the country.
Another factor, which in my view will be bearish for the Argentine Peso’s value, is political uncertainty. Large fiscal and current-account deficits, high inflation against the backdrop of catastrophic ARS depreciation, weak investor confidence in stability of the economy of Argentina and appropriate outflow of foreign investments, could weaken the authority of Mr. Macri. The next presidential election will be held in autumn 2019 and I think we will see the bitter power struggle. In addition, IMF, support of which is used by the current government, has bad name in Argentina after country’s profound crisis in 2001-2002. So if something goes wrong, it would be severe problem for Mr. Macri.
According to the analysts estimates in 2018-2019, we will not see the strengthening of the Argentine Peso. During 2018 the USD to ARS exchange rate will be approximately equal to the current levels. In 2019 ARS will depreciate more strongly against the backdrop of the presidential election. And finally in 2020 we will see appreciation of Argentine Peso against US dollar. However, I think that the ARS appreciation in 2020 will depend heavily on election results, so I see potential volatility risk for exchange rate.
Over the past year, the Turkish lira has lost 44% of its value against USD. And I expect further depreciation of TRY, due to high level of domestic political instability, increasing regional tensions and decline in foreign investors confidence.
In 2017 Turkish economy showed strong real GDP growth of 7.3% (vs 3.3% in 2016), driven by state support measures, government loan guarantees, government pressure on banks to boost the domestic lending growth, as well as rising export competitiveness. However, in my view in 2018 the growth of Turkish economy will slow down to 3-4%. This forecast is based on the detrimental effect of tax increases, rising political turbulence and social tensions, fatal TRY depreciation, which collectively will exceed the government efforts to rise inward investments.
As for the high trade deficits, in my view it will continue in 2018-2022, given by mentioned Turkish lira devaluation, as well as increasing commodity prices. In the mid-term I expect the growth of the tourist arrivals, however keep in mind that the major risk for the industry is the possibility of the new terrorist attacks.
In my article there was much talk about Turkish political instability. And indeed I think that the political factor will make negative impact on the country’s economy. The unconditional authority of Mr. Erdogan, which is provided by the political persecutions and arrests of possible competitors, will exert downward pressure on the country’s development. Also it stands to mention about Turkey’s deterioration in relations on the international stage. In my view, Turkey looks like as an unstable and unpredictable partner, which could quickly change allies. That’s why I’m not sure that in the medium-term we will see some positive news about improvement of Turkey’s international relations.
According to the analysts estimates in 2018-2019 the USD to TRY exchange rate will be approximately equal to the current levels. Maybe in 2020 we will see appreciation of Turkish lira against US dollar. However, I’m not confident like analysts in this TRY strengthening, so you can boldly plan your trip to Turkey.
Brazil is the next country where you can spend your holiday, using my travel guide based on currency depreciation. For the last year the depreciation of Brazilian Real wasn’t so dramatic like Argentine Peso and Turkish lira. Anyway BRL has lost 22% of its value against USD and I see potential for further weakening.
In my view the economy of Brazil will continue to recover from profound crisis in 2015-2016, against the backdrop of the rising commodity prices. However, I don’t expect hasty growth, due to uncertainties around upcoming general elections which will be held in October 2018, as well as strong USD and more severe financing conditions. Therefore I expect the GDP growth of 1.7-2.5% in 2018-2020.
The upcoming general election is the major uncertainty factor for the economy of Brazil. The generality of voters are indignant about the low standards of living, corruption, as well as high crime levels. Key challenge for the next government will be to show possibilities to solve these problems and, in addition, to reach the stable growth of Brazil’s economy, as well as to increase the investor confidence. However, the main candidates for the presidency have different views on the achieving goals. So it will be unpredictable and risky for the Brazilian Real.
According to the analysts estimates in 2018-2020 we will not see the strong strengthening of the Brazilian Real. During 2018 the USD to BRL exchange rate will be slightly lower than the current levels. In 2019-2020 analysts expect that BRL will strengthen by 8% in comparison with the exchange rate in 2018. Honestly speaking, I’m not so positive in my forecast as analysts. I expect that in the mid-term we will see the further depreciation of BRL against USD, due to uncertainties regarding the new government. So it’s time to add Brazil to the must-visit list for 2018-2020.
Russia is the final destination of my ‘depreciated countries’ guidebook. The most dramatic depreciation of the RUB against the USD occurred in December 2014 to March 2016. For this period the Russian Ruble depreciated almost twice. Therefore, the loss of value of 10% over the past year looks not so frightening. However, I expect further RUB depreciation on the back of new US sanctions and strained international relations.
I expect that Russian economy will continue its growth and will show GDP growth of 1.6-1.8% in 2018-2020, which will be supported by increasing fixed investments and private consumptions. Also, against the backdrop of the higher oil prices, the current-account surplus of Russia increased to the equivalent of 2.2% of GDP in 2017 from 1.9% in 2016. Russia is planning to increase oil production, so I expect Russia’s current-account surplus will continue in 2018-2022 amid the oil prices positive outlook.
At first sight everything looks positive for the Russian economy. However, don’t forget about the sanctions against Russia, which damage country’s economy. I’m sure that Mr. Putin will continue to maintain his position on the international stage. Therefore, in my view, we will see new sanctions against Russia. And it will be regular blow to the value of the Russian Ruble.
According to the analysts estimates in 2018-2020 we will not see the strong strengthening of the Russian Ruble. Maybe in 2020 we will see appreciation of RUB against USD, however, its value will be slightly less than in the beginning of this year. As for me, I’m not so positive in my forecast as analysts and I expect the loss of the Russian ruble will be higher.
It’s time to pack your bags
In this article I told you about my approach in choosing travel destination taking account of the currency depreciation versus United States dollars. I chose the top 4 countries whose currencies have lost the most value against USD over the past year and have the potential to further weaken. The main losers (or leaders of your savings on the trip) are Argentina (54% weakening), Turkey (44% of weakening), Brazil (22% of weakening) and Russia (10% of weakening). And in my view the downward trend for these currencies’ value will continue in 2018-2020. So it’s time to pack your bags and go on your first trip. Have a safe journey!