EM problems concentrated in Argentina & Turkey

The Argentine Peso and Turkish Lira came under fire this month, prompting policymakers in both countries to aggressively hike interest rates. The two currencies have firmed a bit, but are still down by over 15% on the month. Other EM currencies also weakened against a strengthening US dollar, but by a much smaller degree. This reflects the fact that other EMs’ external financing vulnerabilities are much smaller. The evidence suggests that macroeconomic stresses will also be primarily focused on Argentina and Turkey, two countries with large economic imbalances and limited reserves. Our financial conditions indices – which are constructed from a range of indicators including market interest rates and credit spreads – show that conditions tightened significantly in Argentina and Turkey, but remained essentially unchanged in other major EMs. Indeed, in Turkey financial conditions are now at their tightest since the aftermath of the taper tantrum.