Macro Focus – The top 6 emerging markets at risk

by: Arjen van Dijkhuizen , Peter de Bruin

150908-Top-6-EMs-at-risk1.pdf (529 KB)
  • A tough year for emerging markets. The slowdown in emerging markets (EMs) is accelerating this year, driven down by weak domestic demand, subdued external demand and falling commodity prices. Moreover, the recent market turmoil surrounding China and other EMs and the looming Fed lift-off has triggered capital outflows and a tightening of financial conditions. We have recently cut our growth forecasts for several EMs in Asia (South Korea, Taiwan, Singapore, Thailand) and Latin America (Brazil, Colombia, Chile) and expect overall EM growth to fall to around 3.5% this year (2014: 4.4%), picking up to around 4.5% in 2016.


  • Risks tilted to the downside. However, uncertainties about the EM outlook have clearly risen, with risks tilted to the downside. Assuming a scenario in which risk sentiment versus EMs remain negative until the start of 2016, annual growth in EMs could fall by roughly 0.5 – 1 %-point in 2015 compared to our base scenario. As a result, 2016 will start on a weaker footing. In an even more adverse scenario – assuming risk sentiment versus EMs to remain similar to the situation seen in late August – we may see annual EM growth falling by more than 1%, with even larger spill-over effects into 2016.
  • EM vulnerabilities stem from China and the Fed. We investigate which EMs are most vulnerable to two dominant risk factors: China’s slowdown and the related drop in commodity prices as well as the anticipated Fed Iift-off. We have distinguished three vulnerable groups (although with some overlap): 1) commodity exporters, 2) EM Asian countries with strong “China-linkages” and 3) countries with fragile external finances.
  • Commodity exporters feeling the heat. Countries we deem most vulnerable to the fall in commodity prices are the ‘usual suspects’: Russia and Ukraine in emerging Europe, Brazil, Chile, Colombia, Peru, Ecuador and Venezuela in Latin America and Malaysia and Indonesia in Asia. In addition, the Gulf region and most parts of the CIS and Africa are also impacted strongly. However, for many EMs (including China, India, South Korea and CEE countries) the drop in commodity prices is a net positive.
  • Emerging Asia: Which countries are most exposed to China risks? In emerging Asia, Hong Kong and South Korea have the strongest export linkages to China, followed by Philippines, Singapore, Malaysia and Thailand. In addition, currency depreciation versus the US dollar adds risks as repaying FX-denominated obligations will become more expensive. We believe those risks are rising, but are still contained for most of Asia except for Indonesia.
  • Which countries are most vulnerable to a Fed lift-off? Looking at emerging markets’ external vulnerability, countries such as Turkey, Brazil, Colombia, South Africa, Malaysia, and Indonesia stand out. Typically, these countries have a combination of large current account deficits, high short-term debt service burdens, significant amounts of portfolio investment liabilities and/ or external debt and only limited buffers in terms of FX reserves.
  • So, which countries are most at risk? Taking all risk factors into consideration, we have selected six countries which we deem the most vulnerable and classify as ABN AMRO’s fragile six. Countries in Latin America seem to be hard hit, according to our analysis. We are particularly worried about Brazil and Colombia. Both countries are commodity exporters, have weak external fundamentals, while Brazil is also facing political turmoil. In Asia, Indonesia and Malaysia stand out due to their dependency on commodities, trade links with China and external fragilities. Finally, we conclude our list with Turkey and South Africa. Both countries face political challenges, while having to cope with poor external fundamentals.
  • Downward rating pressures to intensify. There is an increased likelihood that some of these countries will face rating downgrades. Moody’s recently downgraded Brazil to the lowest investment grade (Baa3), while S&P (BBB-) and Fitch (BBB) have a negative outlook. S&P is also worried about Turkey, as is Moody’s, while Fitch’s outlook of South Africa is negative. If sentiment does not improve, these countries are likely to face outgoing capital outflows, which will put negative pressures on their currencies. In turn, this will drive up inflation and force their central banks to take action, denting their economic outlook even more, and risking that these countries fall into a vicious downward spiral.