After Turkey, who is next? A guide to turmoil in the emerging markets



Can it get worse for emerging markets? It depends on where you look.

Emerging markets are battered as a result of the financial crisis in Turkey, forcing investors to look critically at other countries with less than untouched balance sheets and high debts in US dollars. The maintenance of this debt is particularly important because the currencies of the emerging markets have been hijacked in recent weeks against a rising dollar.

Fortunately they recently received help from an unexpected source: Donald Trump. The US president criticized his central bank on Monday for raising interest rates, sending the US dollar lower.

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But the relief can be short-lived. Several emerging markets face complex risks – significant current account deficits, persistent debt problems and political uncertainty – which can not easily be resolved. Here is a look at four particularly vulnerable countries.

Turkey

In some respects, no country has fully taxed external debt like Turkey.

The non-financial private sector of the country has borrowed more in foreign currency than any other emerging market, according to the Institute of International Finance.

Especially the borrowing of US dollars was considerable. Non-bank borrowers – a group that includes government, households and most companies – hold nominal debt in the US equal to 23 percent of the gross domestic product in 2017, compared with 12.4 percent of GDP in 2008, according to National Bank Financial.

That is a problem, because most Turkish companies get their income in lire – 37% against the US dollar this year, making debt payments heavier.

The political worries of Turkey have also not subsided. President Recep Tayyip Erdogan has risen against higher interest rates and concerns about the independence of the central bank, because it aims to temper the continued high inflation rates.

Brazil

In January, the economists surveyed by Brazil's central bank predicted a growth of 3 percent in 2018. Their estimate has since halved.

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After a crippling recession, Brazil has emerged with more lukewarm expansion than expected, along with a stubbornly high number of unemployed and a currency that has crumbled against the US dollar. The situation suggests that a populist can come to power during the elections in October, which further disturbs a delicate situation.

"Indeed, if it becomes clear that the next government will not be able to implement the necessary fiscal reforms – namely to revise the expensive social security system – are looking for more pronounced volatility in Brazil's financial markets," said the MET economists Art Woo and Sarah Howcroft on Friday in a note for customers.

South Africa

Like Turkey, South Africa has not hesitated to try foreign investors. "The almost doubling of the share of government bonds from foreign investors makes the South African border more vulnerable to shifts in sentiment on the global market," wrote Bloomboom's economist Mark Bohlund last week. The budget deficits and deficits in the bank's current account depend on the financial inflow, while the moderate prices for metals, an important export, only make things worse.

Venezuela

It is not always labeled as an emerging market, but Venezuela has been a basket-case for years. Affected by the runaway inflation, Venezuela has implemented a number of dramatic measures to remedy the situation, including a devaluation of 95 percent and a minimum wage increase of more than 3,000 percent. The movements are "too little, too late," wrote Siobhan Morden, head of the fixed income strategy of Latin America at Nomura.


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