Emerging-market stresses have been building since at least 2013. Investors may have forgotten the effect of the "taper tantrum" on the so-called Fragile Five — Brazil, India, Indonesia, Turkey and South Africa — a term coined by Morgan Stanley to describe their vulnerability to capital outflows. Monetary accommodation, lower current account deficits and growth disguised the underlying challenges, attracting more capital to those markets.
The textbook recipe for an emerging-market crisis requires a large dose of debt and an associated domestic credit bubble, including misallocation of capital into uneconomic trophy projects or financial speculation. Then add: a weak banking sector, budget deficits, current account gaps, substantial short-term foreign currency debt and inadequate forex reserves. Season with narrowly based industrial structures, reliance on commodity exports, institutional weaknesses, corruption and poor political and economic leadership.
Based on these criteria, the number of emerging markets at risk extends well beyond Turkey and Argentina. Like Tolstoy's families, each nation has different sources of unhappiness.
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