Emerging markets generate high growth and are less stable ecnomies because they borrow low-interest US dollar to accelerate economic growth.
When Fed tightens, the EMs are hurt by their USD-denominated debts. Costs of financing surge as they face a sellout of local currency, sovereign credit ratings being put at risk, along with a withdrawal of foreign investment. A weak local currency will also cause imported inflation in countries that long maintain in a trade deficit. In such case, as there’s a lack of foreign reserves, the country’s insolvency risks increase.
Foreign debt to GDP and current account balance to GDP can help us rate the EMs from the healthiest (the fourth quadrant) to the least healthy (the second quadrant). This Visual helps identify the strongest & weakest EM in uncertain times.
Malaysia and Vietnam have high USD-denominated debts; whereas their current account balance is high, too, and they remain somewhat resilient in times of risks.
The second quadrant countries are the weakest against market risks. They keep a long-term current account deficit and live off debts in the US dollar. When the US dollar strengthens, countries like Turkey, Chile, South Africa, Colombia and Argentina are unable to dodge the risks.
Indonesia, Brazil and India maintain a trade deficit while taking advantage of their demographic dividend and strong exports.
Overall, Thailand and Russia are the healthiest economies among all emerging economies in the Central and South America, Euro-Arica and the Southeast Asia. They keep the most current account balance and the least foreign debts, which help survive fast withdrawls of foreign investment.
X-axis: Current Account Balance / GDP Countries with high current account balance are more likely to remain stable while Fed tightening.
Y-axis: Foreign Debt / GDP A stronger US dollar will cause their debts to surge, insolvency risks rising.
The second quadrant countries are the most vulnerable emerging economies to a strong US dollar.