DAVOS/LONDON Top emerging market policymakers moved to allay concerns about their economies on Friday after investors sold off their currencies, raising fears of a broad market rout.
The U.S. Federal Reserve's plan to gradually withdraw its stimulus has long been expected to lead to a pullout from emerging markets. But the prospect of an economic slowdown in China added to concerns on Friday that emerging markets, particularly those with large current account deficits, may struggle to support their currencies this year.
Argentina said on Friday it would relax currency controls it had long defended as essential, in a policy reversal forced by high inflation and a tumble in the peso.
Turkey's lira hit a record low despite an estimated $3 billion (1 billion pounds) of intervention by its central bank the previous day. The rouble and the rand also languished at levels not seen since the 2008-2009 financial crisis.
Turkey's deputy prime minister, Ali Babacan, played down the lira's slide, however, describing it as a "re-pricing process" due partly to the Fed and partly to recent political turmoil in the country.
He said that the central bank was taking the necessary steps to deal with the situation, adding that Turkey was protected against market swings by its sound finances.
"The balance sheet of the government, the banks and households are quite well protected against market volatility," he told a panel at the World Economic Forum in Davos.
Mexican Finance Minister Luis Videgaray told Reuters Television in an interview at Davos that the current volatility would not be a major disruption for his country.
"Mexico is an emerging market, so all volatility is going to have some effect. But Mexico is well-positioned to weather the currency storm," Videgaray told Reuters TV on the sidelines of the gathering of business and political elites in the Swiss mountain resort.
Policymakers and analysts at Davos also said that all emerging markets are not equal and that the market turbulence will drive investors away from economies that are suffering, but not from the stronger ones.
"Differentiation will be important," Videgaray said.
In Turkey, the central bank has refused to raise interest rates even though the lira has fallen almost 9 percent this month, raising fears of mounting inflation and an investor exodus. It has relied instead on auctioning dollars, and on Thursday resorted to what analysts said were its first direct interventions since early 2012.
Despite these sales, estimated to total almost a tenth of its reserves, the lira dropped almost 2 percent, falling through the key 2.30 level.
The lira is only one of many currencies feeling the heat from investor worries over China and over the reduction in U.S. stimulus, expected from this month.
Central banks of several emerging markets were believed to have intervened to defend their currencies on Friday including India, Taiwan and Malaysia.
Russia again moved the rouble's trading band after $350 million (212 million pounds) in hard currency sales.
There was little respite, however. The rupee, Brazilian real, rouble and rand all fell more than 1 percent to the dollar. The Russian currency also hit a record low to the euro.
"I think we may see some actions from central banks, they will try to curtail the sell-off ... They are unlikely to be able to stabilise the currencies," said Lars Christensen, chief emerging markets analyst at Danske Bank in Copenhagen.
Christensen said currency weakness would ultimately help lift growth, but in the meantime, pain would be intense.
"If you are an emerging markets investor, you are seeing a lot of pressure on your positions," he said.
Investors have been fleeing - almost $4 billion has exited emerging equity funds so far this year. The week to January 22 saw them lose $2.4 billion, banks said, citing data EPFR Global released to clients late on Thursday.
Bond funds were more resilient, with just $0.4 billion of outflows, but they too have lost $1 billion so far in 2014.
There are also growing signs of contagion.
The losses in the more vulnerable emerging markets with big current account deficits have now spread to relatively robust assets such as the South Korean won and Polish zloty. The won suffered its worst weekly loss since mid-2013
They are also reverberating across stock markets in Europe. Spanish shares lost 1.7 percent because of their exposure to Latin American revenues.
Funds such as Aberdeen Asset Management and Ashmore, with large emerging-market investments, led losses in London, falling 4-5 percent on the day.
The moves come after a day of losses across emerging markets, with Argentina's peso seeing its worst one-day trading session since the country's 2002 financial crisis.
"GET USED TO IT"
After stunning the world by clocking over 10 percent growth on average for three decades, China took the bold step last year to wean itself off credit and investments and instead try to boost domestic consumption. As a result, its growth rate has steadily dipped, and data this month showed its economy grew 7.7 percent in the last quarter of 2013.
But Lin Boqiang, director of the China Centre for Energy Economics Research at Xiamen University, said at Davos that investors couldn't expect China to keep growing at the rates it has until now.
"There is a substantial slowdown in China, and we just have to get used to it," he said in an interview.
Several of Friday's sessions at the Davos forum focused on the future of emerging markets and how long the turbulence they are experiencing would last.
Corporate executives said they still viewed these markets as big growth opportunities despite the currency volatility.
Renault-Nissan chief Carlos Ghosn said he was not alarmed by the latest forex market moves.
"You have to be ready when you invest in emerging markets for ups and downs," he told one Davos panel on Friday evening.
Mexico's Videgaray said emerging markets knew 2014 would be volatile as the Fed scales back its stimulus. But he added that Mexico's currency, the peso, was currently quite liquid.
"I don't see any problems of liquidity in the market for the Mexican peso," he said.
Our top photos from the last 24 hours.