Publications /

Emerging markets face multiple tantrums
July 3, 2018

The addition of a fourth US rate rise to the Federal Reserve’s 2018 dot-plot graph after the June meeting of the Federal Open Market Committee sparked a bout of portfolio outflows from emerging markets. This followed a fleeting upswing at the beginning of the month that fell short on reversing the unwinding of exposure and sell-off of assets in May (Chart 1). Country differentiation has been accentuated, with exchange rate devaluation pressures and capital outflows occurring more notably in economies exhibiting higher vulnerability to sudden stops in foreign finance.


Since April I can single out at least three different factors that have led to sudden bursts of fears among investors of losses in portfolios in individual emerging markets. First, there is the ‘dollar tantrum’. Argentina and Turkey were the two major cases of a rout in May, and they entered the current phase of rising US Treasury yields and dollar values sharing weaknesses. Their current account deficits had deteriorated substantially in the recent past. Since the 2013 ‘taper tantrum’, Argentina’s current account deficit has jumped to levels comparable to those of the then ‘fragile five’ (Brazil, India, Indonesia, South Africa and Turkey), while Turkey was the only one among the five countries to have remained there. In both cases, inflows of foreign direct investment fall significantly short of covering the gap in the basic balance of payments. Because of structural current account deficits that are not financed by FDI but rather by hot capital inflows, both countries have featured low levels of reserve adequacy.

Another common feature they share is that their dollar-denominated debt as a share of GDP makes them more fragile in the light of the dollar’s strength over recent months, while corresponding debtors in both economies do not have a ‘natural hedge’ in terms of dollar revenues. Ultimately, currency mismatches on dollar-denominated debtors’ balance sheets have made them prone to shocks arising from dollar strengthening.

This combination of dollar-denominated debt and low levels of reserve adequacy in Argentina and Turkey made both economies highly sensitive to the effects of the mid-April US Treasury yield spike. Under such circumstances, any events seen as undermining commitment to appropriate policies could trigger an unwinding of positions by asset holders. This occurred in both countries amid rising doubts about their commitment to monetary policy targets.

Second, there is the impact of a ‘political tantrum’ on capital outflows and exchange rate depreciation pressures in Mexico and Brazil. For the latter, although balance of payment conditions are relatively sound and confidence in monetary policy is high, prevailing fiscal trends highlight Brazil’s weakness in the absence of public expenditure reforms. Recent polls unfavorable to candidates committed to such reforms who will stand in October’s general election have fed fears that led to portfolio rebalancing away from Brazilian assets. In response, the central bank sold a large amount of local currency-denominated foreign currency swaps to allay volatility and capital outflows.

A third source of shock is a ‘trade tantrum’. Concerns about spillovers from the US-China trade war on global value chains have affected asset values in some Asian economies.

"The trade war between the US and China, as well as uncertainty regarding the ability to accomplish fiscal reforms in Brazil for instance, have exacerbated the risk of rebalancing investors’ portfolios away from emerging markets assets"

Raft of risks

The baseline scenario for emerging markets is that GDP growth is likely to decelerate in the near term. Portfolio rebalancing and exchange rate realignment tend to worsen the growth-inflation trade-off. Heavy dependence on continued external financing is concentrated in just a few emerging markets. Only a few countries have balance of payments deficits that point to critical vulnerabilities, and overall reserve adequacy is close to its record high. To some extent, the weight of FDI in the composition of capital flows should make emerging markets more resilient against the impact of global portfolio rebalancing.

This view is subject to several risks associated with further US yield spikes and dollar appreciation. Investors will need to remain aware, too, of the effects of the Fed’s balance sheet unwinding, in tandem with rising US bond issuances. Depending on financial market conditions and risk appetite, there might be some crowding-out pressures on emerging market bond holdings, particularly if the Fed decides to speed up its balance sheet ‘normalization’.


  • October 14, 2022
    En attribuant le prix Nobel d'économie 2022 à Ben S. Bernanke, Douglas W. Diamond et Philip H. Dybvig, le jury Nobel a voulu distinguer des travaux, remontant aux années 1980, qui permettent de mieux comprendre l'implication des banques dans les crises. Travaux pionniers, également, dans l'élaboration d'une théorie bancaire, où l'analyse historique est présente avec Ben S. Bernanke qui a longuement étudié le rôle des banques dans la crise de 1929, afin de ne pas renouveler les erreu ...
  • Authors
    August 12, 2021
    Macroeconomic dynamics in the U.S. economy has increasingly become associated with asset price fluctuations in the past few decades. Financial conditions have increasingly become an influential factor shaping the cyclical pace of the macroeconomy. There has been a mismatch between rising financial wealth and the pace of creation and incorporation of new assets. Several secular stagnation hypotheses offer explanations for the insufficient creation of new assets. Public debt—and its p ...
  • Authors
    December 30, 2020
    According to this month’s OECD economic outlook, global GDP --- which took a huge hit from the pandemic and is still 3% below its level of a year ago – will not recover its pre-pandemic level until the end of 2021. In a downside scenario, the return could take almost a year longer. The OECD predictions, which imply high and protracted unemployment, are in line with the view of many other official and private organizations. The arrival of effective vaccines such as Pfizer-BioNTech wa ...
  • Authors
    December 23, 2020
    This article was originally published on Bruegel  A recovery from the COVID-19 recession is underway though the suffering is far from over, especially for the most vulnerable. Inequality is both a consequence of the pandemic and a cause of its severity. Many countries need comprehensive policy change to address its worst effects. At the end of a tragic year marked by pandemic and increased poverty, the miraculously rapid arrival of vaccines stirs great hope. The COVID-19 recession ...
  • Authors
    Souha Majidi
    June 5, 2020
    Face à l’ampleur des retombées économiques et sociales des crises sanitaires, comme la Covid19, l’aide publique au développement peut jouer un rôle essentiel dans l’atténuation de l’impact des épidémies sur les économies les plus fragiles et vulnérables. L'aide publique au développement (APD) vise non seulement à combler le manque de capital nécessaire à amorcer une dynamique forte de développement, mais aussi à amorcer la capacité des Etats à répondre aux risques sanitaires et sécu ...
  • Authors
    Mehmet Sait Akman
    Shiro Armstrong
    Anabel Gonzalez
    Fukunari Kimura
    Junji Nakagawa
    Peter Rashish
    Akihiko Tamura
    Carlos A. Primo Braga
    February 9, 2020
    In the context of his role as chair of the T20 task force « Trade, Investment and Globalization », our senior fellow, Uri Dadush has led the T20 brief under the theme "World Trading System Under Stress: Scenarios for the Future", which has been published in Global Policy. The world trading system has been remarkably successful in many respects but is now under great strain. The causes are deep‐seated and require a strategic response. The future of the system depends critically on r ...
  • Authors
    Satyandra Nayak
    August 27, 2019
    Since the Fed’s July meeting, when the Fed Funds Rate had a 0.25% cut, fears about the impact of the US-China trade war on the global economy have escalated. The US yield curve inversion received much attention as a harbinger of a slowdown in the global and US economic outlooks. We approach here whether lights on next monetary policy events can be obtained from reading the minutes of the Fed’s meeting – and of the July meeting of the ECB governing council – released this week. The ...
  • Authors
    August 13, 2018
    Depuis la fin de l’année 2017, le président Donald Trump mène plusieurs batailles commerciales, contre différents partenaires, sous prétextes de sauver des emplois industriels américains et de réduire le déficit commercial des États-Unis. S’il est difficile de se prononcer sur les effets des combats commerciaux amorcés par le président Trump, l’importance des opposants et des échanges pour l’économie mondiale en fait une source de risque pour la croissance, les emplois et les prix à ...
  • Authors
    August 6, 2018
    The IMF released last July 24 its latest assessments of the current account balances for the 30 largest economies in its External Sector Report 2018 (ESR). There was no major change in 2017 relative to previous years and the reconfiguration of surpluses and deficits that has prevailed since 2013 was essentially extended. However, there are reasons to expect more abrupt alterations ahead, as the U.S. fiscal easing under high employment conditions unfolds. Given the context of ongoing ...