For a couple of months the debate on the possible difficulties of some of the emerging countries has progressively enriched itself with contributions, among which we remember the - illuminating - one by prof. Giulio Sapelli on the pages of this journal ("Where are the BRICS going in the new season of globalization", 28 August 2013).
To the many authoritative voices is now added that of SACE, which publishes a focus on its site entitled “A hot summer for emerging countries”.
Tensions on the international capital markets have been increasing since mid-May. The currencies of 5 major economies (India, Türkiye, South Africa, Brazil and Indonesia) have come under downward pressure which has resulted depreciations in the order of 15-20% since the beginning of the year.
At the basis of these depreciations, according to SACE, lies a readjustment in the flow of international capital which has caused an increase in outflows from emerging markets. Behind these movements there are essentially two phenomena:
- the reduction of the growth gap between advanced and emerging countries. In the latter, moreover, a slowdown in expansion, after years of development at very high rates, was foreseeable; while in many advanced countries – unfortunately not in ours – the economy seems to start growing again after five years of crisis;
– the announcement of a review of the Federal Reserve's hyper-expansionary policy in the United States.
In terms of country risk, what would be the short-term impact of these large changes in the exchange rate for India, Turkey, Indonesia, Brazil and South Africa? These are nations with different macroeconomic situations, which do not allow for a single answer.
In terms of credit exposure, although countries such as India and Brazil have substantial levels of public debt, the percentage of debt in foreign currency is limited, both in relation to public debt alone and also considering private sector debt. Unlike the case of Turkey, Indonesia and South Africa, which have higher levels of foreign debt (in the case of South Africa concentrated mainly in the private sector).
SACE realistically concludes that it is difficult to think that the current turbulence on the currency markets could lead countries such as India, Turkey, Indonesia, Brazil or South Africa to a full-blown financial crisis. However, further pressure on the reference currencies cannot be excluded and, if added to other weaknesses (see in particular the case of South Africa), could create serious problems for the economy of individual countries.
The risk is related more to private counterparties and their foreign currency exposure in terms of debt, costs and revenues.
It is therefore necessary beware of local counterparties particularly exposed to currency depreciation, due to:
– high percentage of debt in hard currency (especially if short-term);
– poor vertical integration and need for supplies from abroad, especially if the reference customers are concentrated on the local market and in sectors with high price elasticity of demand.
