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Trading  | May 29, 2018

Promises, promises, promises from un-named Turkish officials that the country will “steer clear of capital controls” prompted some reflexive buying in the Lira today…

As Bloomberg reports, Turkey is prepared to raise interest rates again if inflation accelerates, according to two money managers who met with Turkey’s central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek in London today. The nation won’t introduce capital controls, the people cited the officials as saying.

But as Bloomberg’s Chief Asia Economist, Tom Orlik, notes, Turkey remains on the ropes – the fault line was an outsize current account deficit that pushed external debt higher. A slide in governance standards left the problem to fester, and policy makers lost credibility in the market.

So given these factors, Orlik asks – and answers – Who else looks vulnerable?

The results show that while Turkey is the worst of the bunch; Argentina, Colombia, Mexico and South Africa are also underperforming.

To be sure, none of those countries have leaders that quite match Turkish President Recep Tayyip Erdogan’s brash indifference to market opinion. However, as Orlik notes, with sentiment already soured and the Federal Reserve poised to move again in June, problems for emerging markets could get worse before they get better. It’s worth looking at who else has rickety fundamentals.

Current account deficits are a source of weakness because they require foreign funding – which is getting more expensive as the U.S. tightening cycle progresses and investors focus more on the risks.

Sustained deficits result in rising external debt. Countries that have borrowed extensively from abroad find that higher U.S. rates and more risk conscious investors increase the cost of refinancing.

Finally, one has to weigh reputation and government effectiveness. Critically, Turkey’s problems of deficit and debt would still have been manageable, if policy makers had taken credible steps to address them. The slide in governance standards, and Erdogan’s recent comments on monetary policy, raised fears that the necessary moves – slowing growth to reduce imports – would not be taken.

 

Putting all those pieces together, Orlik concludes that Argentina, Colombia, Mexico and South Africa end up at the vulnerable end of the spectrum – not as bad as Turkey but exhibiting some of the same problems. At the other end of the spectrum, South Korea, Taiwan and Thailand with their current account surpluses, low external debt and – in varying degrees – effective governance look relatively immune.


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