Why outflows are threatening emerging markets

Part 5

Which emerging market countries are most vulnerable?

The most vulnerable emerging market countries [EM]

As was the case with the European crisis, the countries with the highest balance of payments deficits are the worst positioned. While, during the European crisis, the deficits were much larger, several emerging markets currently within the 4%-to-5%-of-GDP-deficit range are the most vulnerable.

Most vulnerable EM 2013-09-13Enlarge Graph

India (PIN)

Likely the most vulnerable country right now is India (PIN), whose currency depreciation, persistent inflation, and supply-constrained meager growth have the government tied in terms of potential policy corrections.

In the short term, the situation is likely to worsen. Even a year out, the prospects don’t seem as clear, and if the interest is long-term, there will probably be better entry points down the line. Investors see this outlook, so outflows may not slow.

Others countries: Brazil, Turkey, and Indonesia

All these other countries have large balance of payments deficits—4% to 5% of GDP. Like India, the hot investment inflows weren’t invested in improving productivity, so the countries are adrift once the flows stop. While Turkey and other European countries had much larger deficits, their problem is essentially the same and their outcome may be quite similar.

Brazil is a mixed bag to a certain degree. While it has the same problems as these other countries, it’s a relatively closed economy, so its balance of exports and imports isn’t as meaningful as the other countries’. The World Bank ranked Brazil the most closed economy just earlier this year, using 2011 data. Its imports as a percent of GDP are the lowest in the world—close to a mere 13% of GDP. For reference, China’s imports are 27% of GDP and India’s are 30%.

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