Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 269

Emerging markets: Nothing new under the sun

“That which has been is that which will be, and that which has been done is that which will be done. So there is nothing new under the sun.” Ecclesiastes 1:9.

The events overtaking Argentina and Turkey in recent months are textbook cases of an emerging market crisis. Both countries have racked up substantial amounts of foreign currency debt despite having limited foreign currency reserves, have high rates of inflation and are running budget deficits. Their situations are the same as Brazil in 2015, the Asian financial crisis of the late 1990s and the Latin American crisis of the early 1980s. This article reviews the build-up, the breakdown, the responses and who else is at risk.

The build-up

Any review of emerging market crises has to begin with the lenders not the borrowers. There will always be countries, companies and consumers that want to borrow excessively and live it up, but they can only do so if there is a willing lender. This time around, ample liquidity from central bank quantitative easing and yield chasing fuelled by supressed interest rates kick started a global borrowing binge. There’s evidence of this right across developed and emerging market debt, as well as in government, corporate, consumer and financial sector debt.

Now that the US is normalising its monetary policy (quantitative tightening and raising interest rates) and Europe is reducing its quantitative easing, global liquidity is reducing and yield chasing has pulled back slightly. Emerging market debt, European high yield debt and Chinese shadow banking are the first sectors to show this turnaround.

Turkey’s pathway to problems was fairly traditional. It had the largest foreign currency debt to GDP ratio amongst emerging countries and a high rate of credit growth, leaving it poorly placed if lenders wanted out. The failed coup in 2016 strengthened the political hand of its president and allowed him to proceed with popular but damaging economic policies. The threat of trade sanctions from the US further spooked investors and accelerated the downward trend.

Argentina’s pathway was less traditional yet still exhibited many of the same risk factors. It defaulted on its debts in 2001 and sought help from the IMF. It cleared the IMF loans in 2006. It undertook a series of debt restructurings in 2005 and 2010, but a small group of holdout creditors remained. The unresolved debt blocked Argentina from returning to international lending markets until a settlement was reached in 2016. The next 18 months saw Argentina make up for lost time with a series of jumbo bond issues, including US$2.75 billion of 100-year bonds. The buyers of this bond were comfortable lending for 100 years to a country that has defaulted eight times in the previous 200 years. Madness.

The breakdown

Argentina’s currency has been progressively devaluing over time as is expected for a country with very high levels of inflation. However, this accelerated in May 2018 as it became clear that a recession is likely this year. The exchange rate jumped from 20.5 Peso to the US dollar to just over 30 in three months. A recent bond sale failed to achieve the targeted volume, a far cry from the heavily oversubscribed bond issues of 2016 and 2017.

Turkey has seen the Lira jump from 3.5 to the US Dollar a year ago to as high as 7 this month. The 10-year bond yield is now over 21% with inflation running at 16%. Standard and Poor’s downgraded Turkey’s credit rating to B+ this month and is forecasting a recession next year.

The responses

Argentina is following the textbook solution of getting help from the IMF. In return for the US$50 billion standby facility, Argentina is tasked with implementing a range of measures to balance its budget, reduce inflation and clearly delineate the government (fiscal policy) from the central bank (monetary policy). This has included pushing the key central bank rate to 45%, a level that should hammer down inflation and stabilise the currency but with the side effect of a recession or substantially reduced GDP growth.

Turkey is trying to avoid an IMF bailout. The country’s strongman president wants to continue to run budget deficits and is in no mood to accept IMF spending restrictions. The central bank rate has been increased from 8% to 17.75%, but the threat that the president will intervene and push rates down has spooked investors. Qatar has agreed to provide US$15 billion of support which has led to a small turnaround in the Lira. However, without vital economic reforms it’s likely to be a temporary respite to Turkey’s troubles. In recent years Venezuela and Zimbabwe both refused to seek IMF assistance with their economies failing spectacularly.

Who else is at risk?

At a simple level, Pakistan and South Africa appear to be the other emerging markets most at risk. However, as the table below from a Bank for International Settlements report shows many emerging market countries have had material increases in their use of US dollar debt in the last five years. The report also found more than half of the international lending to emerging Asian economies was “hot money” with maturities of less than one year.

Click to enlarge

Pakistan’s foreign currency reserves have dwindled at the same time as its budget deficits have lifted government debt levels. South Africa stands out for its profoundly negative current account balance and consistently increasing government debt to GDP ratio. Ongoing corruption, plans to nationalise the central bank, and the wider emerging market sell-off are scaring off lenders and pushing bond yields higher. At a wider level, while Greece and Italy are generally considered developed economies, their falling GDP per capita levels and weak institutions could push them back into emerging market classification. Greece’s GDP per capita is already well below South Korea and Taiwan, who are generally categorised as emerging markets. Both Italy and Greece have large amounts of debt in a currency they don’t control, very large debt to GDP ratios, weak banks burdened by problem loans and governments that are resistant to economic reforms. Neither has any plan to reduce to their debt levels, other than giving their lenders a haircut.

 

Jonathan Rochford, CFA, is Portfolio Manager for Narrow Road Capital. This article is for educational purposes only and is in no way meant to be a substitute for professional and tailored financial advice.

 

RELATED ARTICLES

Are debt and its servicing cost serious worries?

Diversified opportunities in emerging market debt

Australia’s economic outlook robust, but risks are rising

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.