• 2 hours This Gold Deal Could Be A Boon For The Mining Industry
  • 18 hours 5 Companies That Could Win Big As The U.S. Legalizes Sports Betting
  • 18 hours May Survives No-Confidence Vote Despite Huge Loss On Brexit Deal
  • 21 hours U.S. Trade Deficit With China Grows To Record High
  • 1 day Big Oil Doubles Down On Blockchain Tech
  • 1 day What Top Financial Analysts Are Saying About Brexit
  • 2 days Billion Dollar Opportunity In The World’s Most Exciting Sector
  • 2 days Cash Is Now A $3-Trillion Safe Haven Bet
  • 2 days How Advertisers Are Forced Into Politics
  • 2 days Automakers Go All-In On Electric Vehicles
  • 2 days How Will The Government Shutdown Impact Gold?
  • 3 days 5 Likely Winners In A Booming $400 Billion Gambling Market
  • 3 days Forget IPOs: Direct Listings May Be The New Trend For Tech Unicorns
  • 3 days China’s Souring Economy Drags Down Global Equities
  • 3 days Hackers Tap Into The U.S. Electric Grid
  • 3 days Markets Inch Lower As Investors Remain Cautious
  • 4 days A Billion Dollar Opportunity In The Online Gaming Market
  • 4 days Russia’s Post-Soviet Calendar Boy, The Putin Phenomenon
  • 4 days Can The New Cadillac Rival Tesla?
  • 5 days If It’s Digital, It’s Vulnerable
  1. Home
  2. Markets
  3. Emerging Markets

Which Emerging Markets Will Run Out Of Funding First?

Buenos Aires

For years, in fact for the duration of the U.S. dollar's use as a global carry currency, Emerging Markets - especially those with a currency peg - were a welcome destination for yield starved U.S. investors who found an easy source of yield differential pick up. All that came to a crashing halt first after the Chinese devaluation in 2015 which sent the dollar surging and slammed the EM sector, and then again in recent months when renewed strong dollar-inspired turmoil gripped the emerging markets, first due to idiosyncratic factors - such as those in Turkey and Argentina...

(Click to enlarge)

... and gradually across the entire world, as contagion spread.

And while many pundits have stated that there is no reason to be concerned, and that the EM spillover will not reach developed markets, Morgan Stanley points out that the real pain may lie ahead.

As the following chart from the bank's global head of EM Fixed Income strategy, James Lord, shows, whereas returns have slumped across EM rates, outflows from the EM space have a ways to go before they catch down to the disappointing recent returns.

(Click to enlarge)

One can make two observations here: the first is that despite the equity rout, EM stocks (as captured by the EEM ETF) have a long way to go to catch down to EM bonds as shown by the Templeton EM Bond Fund (TEMEMFI on BBG).

(Click to enlarge)

The second, more salient point is that a key reason for the solid growth across emerging markets in recent years, has been the constant inflow of foreign capital, resulting in a significant external funding requirement for continued growth, especially for Turkey as discussed previously. Related: Auto Industry In Biggest Slowdown Since 2008

But what happens if this outside capital inflow stops, or worse, reverses? This is where things get dicey. To answer that question, Morgan Stanley has created its own calculation of Emerging Market external funding needs, and defined it as an "external coverage ratio." It is calculated be dividing a country's reserves by its 12 month external funding needs, which in turn are the sum of the i) current account, ii) short-term external debt and iii) the next 12 months amortizations from long-term external debt.

More importantly, what this ratio shows is how long a given emerging market has before it runs out of cash. And, as the chart below shows, if we were investors in Turkey, Ukraine, Argentina, or any of the other nations on the left side of the chart - and certainly those with less than a year of reserves to fund its external funding needs - we would be worried.

So to answer the question posed by the title, which Emerging Markets will run out of funding first, start on the left and proceed to the right.

(Click to enlarge)

By Zerohedge

More Top Reads From Safehaven.com

Back to homepage

Leave a comment

Leave a comment