Satyajit Das: textbook recipe for an emerging-market crisis

The current turbulence of emerging markets should not come as a surprise to anyone, says Satyajit Das.

912_MW_P14_Guru
Satyajit Das, author and former banker

The current turbulence of emerging markets should not come as a surprise to anyone, says Satyajit Das on Bloomberg. "The stresses have been building since at least 2013," he says. Back then the "taper tantrum" (a fit of panic that welcomed the Federal Reserve's plans to reduce quantitative easing) took its toll on the "Fragile Five" a term coined by Morgan Stanley to describe the vulnerability of Brazil, India, Indonesia, Turkey and South Africa to capital outflows. Five years on, we may now have a "textbook recipe for an emerging-market crisis".

Such a crisis requires high debt and a domestic credit bubble, as well as a misallocation of capital into uneconomic projects, according to Das. It also requires weak banking sectors, budget deficits and substantial short-term foreign-currency debt (usually debt denominated in dollars that needs to be "rolled over" imminently). Lastly, it requires "narrowly based industrial structures, reliance on commodity exports, institutional weaknesses", and poor political and economic leadership. "Based on these criteria, the number of emerging markets at risk extends well beyond Turkey and Argentina."

Total emerging-market debt grew from $21trn (145% of GDP) in 2007 to $63trn (210% of GDP) last year. Of that debt, around $1.5trn needs to be refinanced in 2019 and the same again in 2020. But "many are not earning enough to meet these commitments" and, worse still, "global liquidity tightening, led by the US Federal Reserve increasing rates and unwinding its bond purchases, reduces capital inflows and increases the cost of borrowing", adds Das. Those stresses are only made worse by current trade tensions and sanctions.

It was higher returns on local-currency debt that drew foreign investors to India, China, Malaysia, Indonesia, Mexico, Brazil, South Africa and eastern Europe in the first place. Now, "weakening currencies may drive them to exit, hurting all assets".

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020