Current-Account Deficits

If a family spends more than it earns, it can make up the difference by borrowing, at least for a while. The same goes for a country that sends more money outside its borders to pay for imports than it brings in from the sale of exports. That’s called running a current-account deficit, and the money borrowed usually comes from foreign investors. Running such a deficit for a long time can leave a country exposed to sudden shifts and swings in global capital flows. That vulnerability helps explain why interest-rate decisions in Washington wreaked havoc last year on economies in such places as Indonesia and Turkey, or why booms in deficit-running countries can turn so quickly into busts, as happened in much of Asia 20 years ago.

From Argentina to Turkey, a slew of developing countries have run into trouble in recent times by relying on fickle outsiders to plug their deficits. Foreign investors can get cold feet for a variety of reasons, some specific (like a deteriorating economy or a change in government), others more general (such as a global stock market selloff). In 2018, a rout in emerging markets was triggered by the prospect of interest-rate hikes by the U.S. Federal Reserve. Investors quickly switched to higher-yielding U.S. assets, raising worries that persistent current-account gaps would prove untenable for many developing countries. That caused currencies to plunge in places such as Indonesia, which increased interest rates six times in 2018 in an effort to support its rupiah, and India, which raised tariffs on communications gear, jewelry and jet fuel in an attempt to damp imports. In Turkey, the deficit exploded as imports fed a debt-fueled building boom, helping to send the Turkish lira to new lows. Current-account deficits played a key role in the 1997 Asian financial crisis, when currency speculators correctly bet that Thailand’s gap of more than 8% of gross domestic product was unsustainable, before turning their attention to other countries in the region.