Three major risk factors – Part 3: Emerging markets

Following a significant growth recovery since mid 2016, the emerging markets are now showing signs of weakness. Confidence surveys are pointing downwards and currencies are struggling (see Figure 8).

Falling currency values have spurred several central banks into raising rates, and dramatically so in the case of Turkey and Argentina. The growth impact for these two countries cannot be overlooked.

Falls in both the Turkish lira and Argentinian peso reflect country-specific problems. However, they have occurred within a broader context of emerging markets weathering more challenging conditions, notably because developed economies are normalising monetary policy.

The performance of emerging-market currencies indicates that investors are using fundamentals to discriminate between countries. The currencies of those countries carrying the greatest macroeconomic weaknesses and/or political or geopolitical risks (Brazil, South Africa, Russia) have been affected worst (see Figure 9).

Contagion to other countries cannot be ruled out, as the situation of the most fragile economies could lead to reduced portfolio exposure to emerging markets in general. Until now, flows had held up very well (see Figure 10).

To this scenario can be added potentially lower Chinese growth. Tighter credit conditions are weighing on infrastructure spending (see Figure 11), and protectionist measures are threatening exports. Although the authorities have announced support, it is moderate compared with 2015–2016 and could take several months to filter into the wider economy. That said, stronger stimulus measures could raise fears of a new debt cycle.

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