Fragile no more: emerging market funding gaps shrink from 2013

LONDON: World interest rates are on the rise, but investors have reacted by pumping US$100 billion (RM428 billion) into emerging markets this year.
The reason? The big balance of payments deficits behind the infamous Fragile Five selloff in 2013 are no longer a problem.
Hints in mid-2013 that the United States might pare easy-money policies sparked a “taper tantrum” across markets.
Hardest hit because of their reliance on foreign capital to plug funding deficits were a quintet of emerging economies – Indonesia, Brazil, India, Turkey and South Africa. They were running current account deficits of over 3% of gross domestic product, and 5% or more in the case of the last three.
With balance of payments crises a real risk, Fragile Five currencies and stocks fell 10-20% after the taper hints.
Since then, slower growth, currency weakness and economic reform have cut the deficits, in some cases to a quarter of 2013 levels. What this means is there is less need for foreign money. As a result, emerging equities and bonds are among the best performing asset classes so far this year.
“That’s been the single most important improvement in emerging market fundamentals since the taper tantrum current accounts are back to levels seen in the mid-2000s,” said Kamakshya Trivedi, co-head of global currency and emerging markets strategy at Goldman Sachs.
“All our research suggests this is a big reason for the resilience with which EMs have absorbed numerous recent shocks – whether the Trump tantrum or rapid moves in core rates in the past month,” Trivedi said.
He was referring to the market selloff after November’s election of Donald Trump as US president, and a recent rise in German and US bond yields to multi-month highs.
Excluding China, a group of 19 big emerging economies now show a current account surplus of roughly 1.5%, having swung from a deficit of just over 0.5% in 2013, according to this chart based on UBS data.
A separate HSBC study showed that even after taking into account the impact of currency depreciation and slower growth, current accounts had a surplus of almost 1% of gross domestic product (GDP) versus a slight deficit in 2013.
Of the 18 countries it analysed, 12 showed a significantly better current account picture compared to 2013 and only three had deteriorated, HSBC said.
Investors remain concerned about some countries – Colombia, not an original Fragile Five member, has seen its gap widen to 4% of GDP. Turkey’s deficit remains over 4%, as political pressure to maximise economic growth has prevented the funding gap from narrowing as much as in other markets.
"We see little to suggest that Turkish lira's vulnerability to external shocks is reducing, unlike in other emerging markets," Morgan Stanley analysts said. – Reuters