The Riskiest Emerging Markets This Quarter

Turkey, Argentina, India, Egypt and Vietnam are the five emerging markets where risk is highest, according to a new E&Y report.

The consultancy looked at 25 countries and drew up a “heatmap of vulnerability,” ranking each country under seven indicators of risk.

The indicators are:

  • The strength of the current account balance in 2012
  • The level of external debt to GDP in 2012
  • The level of government debt to GDP in 2012
  • Average inflation this year
  • Average growth of credit markets as a share of GDP from 2010 to 2012
  • Ratio of foreign exchange reserves to imports in 2012
  • The change in the currency against the US dollar over the 12 months to the end of September 2012

The next five riskiest on the list are Ghana, Indonesia, South Africa, Poland and Brazil.

Turkey, Argentina, Egypt and India are vulnerable to currency and other financial crisis because of their relatively high current account deficits, levels of government debt and inflation, E&Y said in its report.

It noted that the Turkish financial markets have been under pressure since mid-May, when the US Federal Reserve hinted at an end of its policy of printing money to prop up the economy, also known as quantitative easing.

Turkish market interest rates jumped by between 200 and 300 basis points and the Turkish lira (TRY) fell by over 10% to the euro.

In Argentina, “high inflation is reducing the country’s international competitiveness,” the analysts at E&Y wrote. They forecast that in the medium term the country’s growth will be held back by inflation and by the impact of “numerous” economic distortions caused by the government’s interventionist policies.

Egypt’s foreign exchange reserves have fallen by over $20 billion since the Arab Spring turmoil in 2011, and the country may have to pay back $2 billion to Qatar, with whom relations have cooled since the military intervention earlier this year against the Muslim Brotherhood, E&Y said.

“Against the backdrop of slow growth, weak policy implementation and high government spending, the budget deficit continues to widen. This crowds out funds for private sector investment,” it warned.

In India, a sharp fall in the currency and large outflows of capital since May “will continue to drag on the economy in the medium term” and therefore monetary policy will remain tight.

“India urgently needs to push through structural reforms if it is to achieve its long-term growth target of 8% per year,” E&Y said.

In Vietnam, the links between foreign investment and small private firms are weak and state-owned companies look set to maintain preferential access to loans, the report said.

“This could prolong inefficiency and overexpansion,” it said, adding that the country’s fast-growing credit market should be monitored carefully.

The five least risky emerging markets of the 25 countries assessed by the report are Nigeria, China, the UAE, Saudi Arabia and Qatar.

The report, which is published quarterly under the name “Rapid-Growth Markets Forecast,” expects growth in the 25 countries to be 4.7% next year, a full percentage point lower than a previous forecast in July, due to downgrades in growth forecasts for Latin America and Asia.