Type Tantrum 2.0: Beware of TUCKANS

One year after Covid-19 pandemic, the global economy faces a growing risk of a balance of payments crisis. In fact, 2020 has already seen a record seven defaults on the sovereign debt of Argentina, Belize, Ecuador, Lebanon, Zambia and Suriname (which have defaulted twice) . In this context, any new shock could plunge the weaker countries into chaos.

What could be the next shock? A Taper Tantrum 2.0.

After all, with a $ 7.3 billion stimulus rocket locked and loaded, the U.S. economy should destroy in a booming recovery. This could prompt the Federal Reserve to start curbing its ultra-loose monetary policy sooner than expected, with serious consequences for Emerging Markets.

We’ve seen this before: in 2013, the Fed’s comments on ending the bond buying program launched after 2008 financial crisis caused an exodus of capital from emerging markets, as well as a significant depreciation of their currencies.

The good news is that this time around, many emerging markets are in a better position than they were in 2013. On the one hand, current account deficits are lower, including in major economies. India, Brazil, Mexico, Turkey and South Africa. . This suggests that these EMs are overall less dependent on foreign capital inflows than they were in 2013 – at least for now. Second, despite the enormous Monetary easing Following the Covid-19 crisis, credit growth is at more sustainable levels, particularly in Brazil, Colombia, Russia, India, the Philippines and Indonesia. This may reflect less demand for credit in the midst of the crisis and will reduce short-term growth prospects, but it also indicates lower liquidity risk than in 2013-14.

“The good news is that this time around, many emerging markets are in a better position than they were in 2013”

In terms of inflation, Argentina, Nigeria, and Turkey could post average annual inflation rates well above 10%, well above their 2013 levels, but for other emerging markets, inflation will likely stay under control. This allows central banks to support their national economies, and possibly governments, in case external credit dries up.

And while emerging market currencies are expected to remain volatile, real effective exchange rates are currently less strained after a year of widespread depreciation. This means that there is less risk of a repeat of a substantial depreciation this time around. Finally, monetary policy is ultra-loose in many emerging markets and is expected to remain broadly accommodative for the foreseeable future, providing space to mitigate any impact of any Fed tapering.

But there are still weak spots: in Turkey, Argentina, Ukraine, South Africa, Romania and Chile, external debt payments due over the next 12 months significantly exceed the level of foreign exchange reserves. official held by central banks.

In fact, in Turkey debt is more than four times greater than reserves. In addition, the share of public debt held by non-residents exceeded 35% of total public debt in Indonesia, Ukraine, Kenya, Romania, Argentina, Turkey, Chile and South Africa. This increases the risk of a sudden reallocation of capital from emerging markets to the United States and financial market turmoil if the Fed raises rates earlier than expected, and without warning.

So which countries are most at risk of facing reality?

Meet the TUCKANS: Turkey, Ukraine, Chile, Kenya, Argentina, Nigeria and South Africa. Taking into account the liquidity risk (based on the current account balance, short-term external debt, import hedging and private sector credit growth) and cyclical risk (based on the risk of currency, inflation, dependence on commodities, stocks and bonds), these emerging markets are most likely to face the music in the event of Taper Tantrum 2.0, especially if Fed actions are not well communicated.

Ludovic Subran is Chief Economist, Allianz SE

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