Login Open account
Australia
Emerging Markets: This is not 1997 again Emerging Markets: This is not 1997 again Emerging Markets: This is not 1997 again

Emerging Markets: This is not 1997 again

Macro
Christopher Dembik

Head of Macroeconomic Research

Summary:  The current weakness in emerging markets is a clear indicator that the global credit cycle is turning down and that more headwinds are coming.

Since mid-April, emerging market currencies have fallen sharply versus the USD. The most significant drops have been experienced by the TRY (-58%), BRL (-22%), ZAR (-20%) and RUB (-15%).
Depreciation versus USD

The current weakness in emerging markets is a clear indicator that the global credit cycle is turning down and that more headwinds are coming.

Since the Great Financial Crisis, an excess of liquidity has supported global growth and flowed to emerging countries, leading to an increase of debt. Over this period, US-denominated debt has increased by 152%, which represents more than $2 trillion.

Foreign debt to EM by currency denomination

Due to monetary policy normalisation, liquidity has been drying up since the beginning of this year. Our model of global USD money supply based on the 25 largest economies reached a peak in January 2018 and is now at its lowest level since Spring 2017. 

The dollar liquidity squeeze along with global tightening financial conditions drives higher funding costs in EM. The most vulnerable countries are the ones with high current account deficits (meaning they are heavily dependent on foreign funding) and high levels of USD-denominated debt.

A break of the Dollar Index above the 95 level, like the one seen this past summer, would add more pain to EM as it would signal that servicing greenback loans is getting more and more expensive. It would certainly constitute a strong risk-off signal and cause more capital outflow from EM.

The downward USD liquidity trend can only be reserved by stronger growth or central bank stimulus, which are both very unlikely in the medium term. 
USD liquidity indicator

Turkey has been the first domino to fall. The country shares a lot of similarities with Thailand in 1997, which at that time faced an external debt reaching 65% of GDP coupled with a currency crisis and a sudden loss of investor confidence. Turkey’s external debt is about 56% of GDP and its short-term US-denominated debt currently sits at its highest-ever level around $200 billion. Its currency has been falling sharply while political risk has pushed away foreign investors. 

The only bright side, and one that we didn't see in 1997's Thailand and don't see in the ongoing Argentinian crisis is that Turkish residents are repatriating foreign assets to deal with this tricky external funding picture, which will bring some support in the short term.
Turkey current account balance

Is another, 1997-style emerging country crisis on the cards? It's unlikely. Not all emerging countries, after all, are equal; we notice that countries with better GDP readings and current account positions are less exposed to the current headwinds. Trade openness is also a key criterion that has more influence than it did in 2013 when the Fed taper occurred.
Current account balance as % of GDP

EMs that have reduced reliance on FX debt have demonstrated better resilience than others other the past few months. These efforts are particularly striking in CEE, especially in Poland and in Hungary where FX-denominated debt has decreased by roughly nine percentage points since the end of 2016. 
Change in EM FX-denominated debt

Contagion has largely been contained globally, expect for countries with high political risk situations (Argentina, Brazil, South Africa, and Turkey). Rising political risk has acted as an aggravating factor for investors. 

Of these four countries, Brazil seems to be in the best economic shape. Its current account deficit stands at only 1% of GDP and it has enough foreign reserves (at $367bn) to efficiently defend its currency. The only negative macro data are linked to the high level of public debt, but since this is owned mostly by domestic holders (95%), the risk is more limited. 

In addition, the latest economic data, especially leading indicators such as the Itaú Monthly GDP reading, tend to confirm economic activity is set to accelerate slightly. We believe that the current vulnerability seen in Brazil will prove short-lived as it is essentially a consequence of uncertainty surrounding the upcoming October election (the first round of voting is on October 7 and the second on October 28).
Brazil: Itau monthly GDP index vs. real GDP

By contrast, tougher days might be coming for South Africa. The honeymoon between President Ramaphosa and investors is definitively over. The country plunged into technical recession in Q2 for the first time since 2009 and political risk keeps rising due to the land reform programme that should be formally implemented at the beginning of next year. 

This agrarian reform has a massive knock-on effect on investors and South Africa is not well-prepared to deal with its negative consequences. The country’s current account deficit has narrowed since 2014 but still stands at 3.2% of GDP, and South Africa does not have enough currency reserves to defend the rand against any prolonged period of speculation. Despite a year-on-year increase of 1.9%, South Africa's international reserves stand at just $42bn, the equivalent of five months' worth of imports.
South Africa current account balance

Looking at EMs as a whole, we have seen a sharp economic transformation over the past decade. The main vulnerability still comes from these countries' strong reliance on USD funding, which has considerably increased since 2008.
 
many EMs, however, notably those in Southeast Asia, face fewer domestic imbalances than in 2013 or in the late 1990s, making them more resilient to the global QE exit and lower USD liquidity. The most fragile countries are those with weak fiscal positions and high political risk. After Turkey and Argentina, South Africa could face higher tensions. On the other hand, the situation should quickly stabilise in Brazil once the election has passed. So far, there is no risk of contagion to any other EM economy. 

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 05

Macro: It’s all about elections and keeping status quo

Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

Read article

FX: The rate cut race shifts into high gear

As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

Read article

Equities: The AI and obesity rally is defying gravity

Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

Read article

Fixed income: Keep calm, seize the moment

With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

Read article

Commodities: Is the correction over?

Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

Read article

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article

  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article

  • Equities: The AI and obesity rally is defying gravity

    Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.

    Read article

  • Fixed income: Keep calm, seize the moment

    With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.

    Read article

  • Commodities: Is the correction over?

    Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia
Products & pricing
Asset Management
Platforms
Accounts & service
General
Other
Legal

Trading can result in losses. Please ensure you understand the risks.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.