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Satyajit Das

We May Be Facing a Textbook Emerging-Market Crisis

Argentina and Turkey look like outliers but the rot could spread fast.

Truck drivers strike in Buenos Aires: The ripples are widening.

Truck drivers strike in Buenos Aires: The ripples are widening.

Photographer: Sarah Blesener/Bloomberg

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.