Who’s next? The fear of contagion is stalking emerging markets again, but Argentina and Turkey have put themselves in the firing line while others have distanced themselves from it.
The shakeout in emerging markets sparked by the “taper tantrum” of 2013 put the spotlight on countries with relatively wide current-account deficits. The turmoil that has hit some vulnerable countries as U.S. rates have risen again has started with similar weak links, but times have changed: there are fewer immediately obvious follow-on targets.
Right now, the uncomfortable spotlight is on Argentina, where the peso has fallen more than 23% against the dollar this year and the country is seeking support from the International Monetary Fund, and Turkey, where the lira has fallen more than 15%. Both stand out for having current-account deficits estimated by the International Monetary Fund in 2018 at more than 5% of gross domestic product: the widest of the emerging-market members of the Group of 20 nations.
Those two countries’ vulnerability has been exacerbated by domestic policy missteps, in particular on monetary policy. Turkey, in particular, faces a credibility challenge, with President Recep Tayyip Erdogan saying he would seek to exert greater influence on monetary policy, which has sent the lira to a record low.
But many other nations have narrower current-account deficits than in the past, having taken account of what happened in 2013. Their currencies are under less pressure this time around.
South Africa, for instance, ran a current-account deficit of 5.9% of GDP in 2013 on the IMF’s numbers and the rand fell around 20% against the dollar that year. But the forecast deficit for 2018 is substantially narrower, at 2.9%, and there is enthusiasm around the political and economic change that new President Cyril Ramaphosa may bring; the rand has given up its gains against the dollar this year but is down only 0.5% in May. In Latin America, current-account deficits for Mexico and Brazil are forecast at less than 2% of GDP in 2018.
Deficits aren’t the only thing for investors to worry about, of course. Russia runs a surplus, but the ruble has been battered by new U.S. sanctions this year and is down 7.5% against the dollar. Notably, however, it has rebounded from its lows and is slightly up against the dollar in May even as clouds have gathered over emerging markets—helped by surging oil prices. That, in turn, may weigh on the deficits of crude importers. And then there is politics, a potential worry for investors in Brazil and Mexico, where elections are looming.
A further rise in the dollar and U.S. Treasury yields—with the 10-year yield now decisively above 3%—will put more pressure on emerging markets in general. For now, though, Turkey and Argentina are being singled out because they are different from other emerging-market nations. Investors are right to be nervous that these are the first cracks in a broader crisis, but contagion may only be an issue for those with pre-existing conditions.