Currency devaluation increases exports, right? Not always. The depreciation of emerging-market currencies may actually result in falling exports, research by the Bank of International Settlements (BIS) and the FT suggests. Conventional wisdom tells us that a weakening currency makes exporters more competitive in the international market, causing an increase in orders and boosting economic output. But as the above chart illustrates, some emerging markets saw only a meager rise in exports last year, even though local currencies depreciated against the USD in 2016. Colombia even saw exports shrink, despite the COP losing around 10% of its value. Classical economic theorists may pat themselves on the back when looking at Egypt’s impressive export volumes, but only manage a shrug when it comes to explaining the fates of South Africa, Taiwan and Peru.

What’s going on? The BIS pinpoints five factors that can depress export growth in EMs during currency devaluation:

• Export prices don’t always change in response to the exchange rate, especially in EMs where almost all of the trade is denominated in USD. In these cases, a weakening currency would increase the cost of imports but would do little to increase the competitiveness of exporters.
• The greenback often rises and falls against other currencies in unison, leading to falling demand for USD-denominated exports in other countries.
• Trade finance is usually denominated in USD, and becomes more expensive to access when the currency is weakening.
• Modern value chains are complex, increasing the input costs for businesses and raising dependency on trade finance. This problem is only magnified by devaluation.
• Increasing capital flows into EMs has meant that many EM businesses have become increasingly reliant on foreign currency-denominated borrowing. This results in rising debt servicing costs and tighter financial conditions when the currency weakens against the USD.