EMFX vulnerability analysis

1. EMFX Vulnerability Analysis
Bert Gochet
Macro Hive
August 2022

2. Summary
• A vulnerability analysis for EMFX suggests:
• In Latin America, the main risk to BoPs comes from a further fall in
commodity prices.
• In CE4, the main risk is a further spike in gas prices and/or a German
recession.
• In EM Asia, the biggest risk is a return to commodity and food inflation
and/or a China slowdown.
• On a country level, the most at risk are TRY, COP, CLP, HUF, ROM, PHP,
and INR.*
• Countries that used to be vulnerable in the past, but where we have seen
improvements, are IDR, BRL, and MXN.
• Comprehensive overview in our ‘Vulnerability Summary Grid’ on page
10.
* We left out Argentina, Egypt, Sri Lanka, Pakistan and Russia from the analysis.
Bert Gochet, Macro Hive
August 2022

3. Long-Term Trend in EM Current Accounts
 2020 and 2021 saw
surpluses for the EM
current accounts as
imports were crushed
during the pandemic and
there were early signs of
commodity inflation.
 In 2022, however, C/A
deficits have returned as
domestic economies
reopen and imports rise.
EM total
EM Asia
North Asia
SE Asia
CE4
EMEA
Latam
-6
-4
-2
0
2
4
6
8
10
Jun/12 Oct/13 Feb/15 Jul/16 Nov/17 Apr/19 Aug/20 Dec/21
EM C/A 10-year trend
*Last datapoint is 1Q22
in %
Bert Gochet, Macro Hive
August 2022

4. This year’s CADs Reminiscent of GFC
 This year’s widest CADs
have suffered from
energy and food inflation,
from Ukraine war-driven
inflation, and from
overstimulated domestic
economies.
 Some countries CADs
are markedly worse this
year than during GFC.
-12 -7 -2 3 8 13
Taiwan
Korea
Israel
South Africa
Malaysia
China
Argentina
Indonesia
Mexico
India
Brazil
Czech
Thailand
Peru
Philippines
Turkey
Egypt
Hungary
Poland
Colombia
Chile
Romania
EM Current Accounts: Recent and During GFC
GFC 2009 Latest 31/Mar/22
in %
Bert Gochet, Macro Hive
August 2022

5. C/A Deterioration Since 2020/2021 Peak
 The biggest negative
swings in CADs since the
pandemic have been in
oil and food importers.
 CE3 countries were
heavily impacted.
-12 -10 -8 -6 -4 -2 0
Indonesia
Brazil
Taiwan
China
Egypt
Argentina
Korea
South Africa
Israel
Malaysia
India
Mexico
Colombia
Turkey
Romania
Peru
Czech
Hungary
Chile
Philippines
Thailand
Poland
EM Current Accounts: Swings Since 2020-21 Peak
Latest 31/Mar/22
in %
Bert Gochet, Macro Hive
August 2022

6. Trade Balance Data Shows Further
Trade Deterioration in 2Q
• Consistent C/A data is only
available until March, but
(monthly) trade balances give a
more recent picture till July.
• Trade balances on the whole in
EM continued to worsen in 2Q.
• This is despite energy and food
prices coming off their peaks
since June.
• This suggests the majority of EM
C/As will be worse in 2Q than in
1Q.
-5
-4
-3
-2
-1
0
1
2
3
4
Jan/2021 Jul/2021 Jan/2022 Jul/2022
Recent monthly trade balance trends
China
Korea
Taiwan
Phils
Indo
Malaysia
Thailand
India
South Africa
Turkey
Israel
Czech
Hungary
Romania
Egypt
Poland
Mexico
Colombia
Peru
Chile
Argentina
Brazil
*expressed as
STDEVs from 5-year average
Bert Gochet, Macro Hive
August 2022

7. July and August ToTs Suggest Bottom in T/B May Still Not
Have Been Reached
 During July and August
MTD when commodity and
food prices fell, EM terms-
of-trade indicators still did
turn direction.
 This suggests C/A and
trade balances will not see
much if any relief during
3Q.
 Note that few Ems have
positive ToTs year-to-date.
-40
-30
-20
-10
0
10
20
30
40
Jan-22 Feb-22 Apr-22 Jun-22 Jul-22 Sep-22
China Korea Taiwan Phils Indo
Malaysia Thailand India South Africa Turkey
Israel Czech Hungary Romania Egypt
Poland Mexico Colombia Peru Ecuador
Chile Argentina Brazil August July
EM terms-of-trade, rebased at zero on Jan 2022
1 July 1 August
Bert Gochet, Macro Hive
August 2022

8. Twin Deficit Concerns
• The combination of a wide C/A and high
debt can be a precursor to a traditional
EM crisis.
• Many EM countries are using subsidies to
blunt the impact of high inflation. But not
all have the fiscal space especially
because they already ran wide fiscal
deficits during the pandemic.
• Indebted countries shoulder an additional
burden in case ToTs worsen further:
• Latam: BRL, COP, ARS.
• EMEA: ZAR, TRY, and maybe
ROM, HUF.
• EM Asia: INR, and maybe PHP.
EM Debt and Fiscal Monitor
Medium term debt trend Short term fiscal trend
Latest
debt/GDP
(2022F %GDP)
Medium-term debt
trend
(2019-22: Chg %GDP)
Fiscal 2022
(latest f'cast %GDP)
Recent fiscal trend
(Chg 2021 to 22) Ranking
China 95 15 -3.7 0.3 6
Korea 52 10 -2.4 -0.9 14
Taiwan 36 4 -1.2 0.7 19
Philippines 63 21 -6.1 2.5 6
Indonesia 42 12 -3.8 0.9 15
Malaysia 65 13 -2.4 -0.9 12
Thailand 60 19 -4.4 0.4 8
India 85 12 -9.0 0.7 2
South Africa 77 19 -5.2 0 3
Turkey 48 16 -4.5 -1.8 9
Israel 68 9 0.6 5.1 21
Czech 25 0 -4.6 1.3 20
Hungary 75 10 -4.9 1.9 13
Romania 49 14 -6.3 0.5 11
Egypt 94 12 -6.2 0 4
Poland 41 -2 -3.6 -1.7 18
Mexico 57 6 -3.9 -0.1 16
Colombia 68 20 -5.0 1 5
Peru 35 9 -2.5 0.1 17
Chile 40 10 -1.5 6.2 22
Argentina* 80 8 -4.9 -1.3 10
Brazil 85 11 -7.7 -3.4 1
*Argentina measured at official FX rate
Bert Gochet, Macro Hive
August 2022

9. FX Reserves Usage Has Risen, but Levels Still Adequate for
Most Countries
• Within EM, Asian central banks have been
the most active in using reserves to slow
currency depreciation, but Chile, Czech,
Egypt and Turkey have done also.
• Reserves adequacy is still reasonable.
However, if intervention were to continue in
2H at the same pace as 1H, this would bring
some countries to borderline levels of
adequacy: IDR, MYR, CLP stand out, and
maybe KRW, INR, THB, PHP.
• TRY and ARS have negative net reserves,
and are in a league of their own. EGP is
close to zero net reserves.
Ranking
China 3,100 13.4 194% -4% -1% 1% 18
Korea 459 7.8 278% -5% -2% 0% 13
Taiwan 548 15.2 278% 0% 1% 0% 20
Philippines 93 8.5 546% -7% -5% -1% 12
Indonesia 100 5.3 204% -6% -3% -3% 7
Malaysia 87 3.9 91% -6% -3% 0% 5
Thailand 249 10.2 332% -9% -4% -1% 14
India 588 10.1 588% -9% -4% -3% 15
South Africa 61 7.0 224% 4% -1% 1% 17
Turkey (27) (1.0) -22% -15% -7% 1% 2
Israel 190 21.8 395% -7% -2% 0% 22
Czech 148 10.0 123% -15% -13% -5% 8
Hungary 25 2.0 146% 0% 7% -6% 6
Romania 43 4.1 0% 4% 1% 10
Egypt 2 0.3 18% -19% -11% -1% 3
Poland 121 4.0 224% 1% 4% 0% 11
Mexico 191 4.1 342% -1% 0% 0% 9
Colombia 52 8.6 -2% 0% 0% 16
Peru 71 20.0 203% -4% -2% 1% 21
Chile 42 5.2 189% -12% -8% -2% 4
Argentina (16) (2.5) 2% -9% -11% 1
Brazil 342 16.0 428% -3% 0% 1% 19
Reserve Usage Monitor
Net Reserves
($bn)
Reserves
(mths
imports)
Reserves (%
short term
debt)
Reserves Level Adequacy Change in Reserve Levels
Chng since
2021
Chng in last
3 months
Chng last
month
Bert Gochet, Macro Hive
August 2022

10. Summary Vulnerability Grid
C/A level* C/A trend
Debt/GDP
level
Recent Fiscal
trend Reserves level
Recent
reserves use
Overall
Rank Biggest risk
Twin
deficit
China
Korea China slowdown
Taiwan
Philippines Food/energy price rise V
Indonesia Coal price drop
Malaysia Oil price drop
Thailand Energy price rise V
India Overheating economy V
South Africa
Turkey Continued overheating V
Israel
Czech German recession / energy prices V
Hungary German recession / energy prices V
Romania German recession / energy prices V
Egypt Currency deval V
Poland German recession / energy prices V
Mexico V
Colombia Oil price drop V
Peru Copper price drop V
Chile Copper price drop V
Argentina Currency deval / money printing V
Brazil V
Overall Vulnerability Matrix EMFX
Bert Gochet, Macro Hive
August 2022

11. Regional and Country
Summaries
Bert Gochet
Macro Hive
August 2022

12. Regions: Latin America
• Latin American C/As in recent years have benefited from
higher commodity prices.
• In some countries, generous fiscal spending has put
them within a whisker of overheating.
• The main risk for Latin C/As is a collapse in
commodities prices eg. in a DM recession scenario
Bert Gochet, Macro Hive
August 2022

13. Countries: Colombia
• A loose fiscal stance plus high oil prices have
caused a growth boom and consequently a wide
C/A deficit.
• The reality of wide twin deficits curtails new
President Petro’s campaign plans for fiscal
reform, at least in theory. FinMin Ocampo said
increasing revenues should be consistent with
expenditures.
• Colombia has wide twin deficits and could suffer
if oil prices collapse: 2022 forecasts are a fiscal
deficit of ~5%, debt stock of 63%, and CAD of -
4.8% of GDP.
• The hope is congress will limit Petro’s spend-
thrift campaign proposals, but this remains to be
seen. -8
-6
-4
-2
0
2
4
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Colombia current account recent trend
(% of GDP)
Colombia Mexico Chile
Argentina Peru Brazil
Bert Gochet, Macro Hive
August 2022

14. Countries: Chile
• Growth this year will be sharply lower than last
year (2% vs 11%) because of rapid fiscal and
monetary tightening. Growth in 3Q, 4Q should
be negative YoY.
• Despite this, the C/A deficit will remain wide
around 8%.
• The new constitution is unlikely to pass in the
September referendum, forcing Boric to accept
a more centrist fiscal policy.
• The recent FX intervention strategy makes
sense. The peso was falling faster than copper
prices, i.e., poses inflation risk. Loss of
reserves is acceptable for now, but a second
such program would raise questions over
reserves adequacy. -8
-6
-4
-2
0
2
4
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Chile current account recent trend
(% of GDP)
Colombia Mexico Chile
Argentina Peru Brazil
Bert Gochet, Macro Hive
August 2022

15. Countries: Brazil
• External accounts remain healthy
despite a deteriorating fiscal and
inflationary outlook heading into the
presidential election.
• 2022 forecasts are for a 3% trade
surplus and a -0.5% C/A deficit.
• A global recession would push the C/A
into a wider deficit.
• Brazil’s weak links are the debt stock of
80% of GDP and its low trend-growth
(~1%), but less so its external finances.
-8
-6
-4
-2
0
2
4
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Brazil current account recent trend
(% of GDP)
Colombia Mexico Chile
Argentina Peru Brazil
Bert Gochet, Macro Hive
August 2022

16. Countries: Mexico
• Mexico under AMLO’s conservative
fiscal management has become an
economic growth underperformer.
• External accounts are nearly flat with
a trade balance of -1% and a C/A of
approximately zero.
• FDI is too slow, at 2-3% of GDP,
despite an opportunity for near-
shoring.
• Remittances are the jewel of the
external finances.
-8
-6
-4
-2
0
2
4
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Mexico current account recent trend
(% of GDP)
Colombia Mexico Chile
Argentina Peru Brazil
Bert Gochet, Macro Hive
August 2022

17. Countries: Peru
• Strong trade balance (~5% of GDP), on
the back of copper prices, has supported
external accounts in the last decade.
• Left-leaning president Castillo has failed
to change Peru’s traditional conservative
fiscal stance (e.g., the deficit for 2022 is -
2% of GDP).
• Calls for the nationalisation of mining
companies have not resulted in action,
but strikes are ongoing.
• A fall in copper prices will dent but is
unlikely to imperil the stability of Peru’s
external accounts.
• Peru has built a large reserves chest.
-8
-6
-4
-2
0
2
4
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Peru current account recent trend
(% of GDP)
Colombia Mexico Chile
Argentina Peru Brazil
Bert Gochet, Macro Hive
August 2022

18. Regions: EM Asia
• Asia as a region has understandably seen its current
account deteriorate over the past 12 months, as oil
and food prices have spiralled up. More recently, a
slowdown in China has crimped EM Asian exports.
• With commodity price trends reversing during July
and August, there may be some relief eventually for
Asia.
• The main risks for EM Asian C/As is a renewed
jump in oil and food prices and/or a further
slowdown in China.
Bert Gochet, Macro Hive
August 2022

19. Countries: India
• India is trying to achieve three competing
objectives: a stable currency, low funding costs,
and high growth. This is tricky in normal
circumstances let alone amid a strong dollar and
elevated commodity prices. The economy is at the
cusp of overheating.
• India has spent significant amount of reserves this
year to slow INR weakening. The reserves level
remains adequate for now.
• Despite lower oil prices, India’s trade accounts
remain historically negative.
• A combination of stagflation amid a global
recession would present a challenge for India’s
current policy framework. It would have to let 1 or 2
of its objectives go to avoid its economy
overheating. -5
0
5
10
15
20
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
India C/A recent trend
(% of GDP)
China Korea Taiwan
Philippines Indonesia Malaysia
Thailand India
Bert Gochet, Macro Hive
August 2022

20. Countries: Philippines
• The Philippines is vulnerable to both energy
and food prices. Hence its C/A fell sharply from
+3% in 2020 to -4% this year.
• But with oil and food prices falling in July-
August, it is on safer ground for the time being.
• It is unlikely Phil’s C/A will become positive
even if import prices fall further. Growth and
fiscal stimulus are still quite strong, as
President Marcos continues his predecessor's
‘Build, Build, Build’ program.
• We would rank Phils together with India as one
of Asia’s most vulnerable EMs to a current
account shock.
-5
0
5
10
15
20
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Philippines C/A recent trend
(% of GDP)
China Korea
Taiwan Philippines
Indonesia Malaysia
Thailand India
Bert Gochet, Macro Hive
August 2022

21. Countries: Thailand
• Thailand’s current account has swung -9%
over the past two years, from +4% to -5%,
because of a collapse in tourism and higher
oil/food prices.
• But external finances were never really at
risk because of a high reserves buffer (40%
of GDP), low debt, and a projection of
eventually returning tourists.
• Tourism is now picking up, and 3Q22 is a
flex point for the current account.
• By 1Q23, the C/A should be back to ~2-4%,
even if oil stays at $100.
-5
0
5
10
15
20
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Thailand current account recent trend
(10% of GDP)
China Korea
Taiwan Philippines
Indonesia Malaysia
Thailand India
Bert Gochet, Macro Hive
August 2022

22. Countries: Indonesia
• Indonesia has graduated from the ‘fragile 5’
grouping it used to belong to during the taper
tantrum.
• Terms-of-trade are stronger than in the past due
to a diversified export mix. Despite falling palm oil
prices, coal and nickel prices have been more
stable. Importantly, volumes of exports are rising.
• Indonesia is not only a commodity exporter, but
also an importer in the form of refined oil. This
keeps its C/A more stable than, say, Malaysia.
• BI has started to tighten policy through liquidity
and a first rate hike.
• If anything, the risk for IDR is in the capital
account with foreign bond holders exiting
positions. But rate tightening will help on this front.
-5
0
5
10
15
20
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Indonesia C/A recent trend
(10% of GDP)
China Korea
Taiwan Philippines
Indonesia Malaysia
Thailand India
Bert Gochet, Macro Hive
August 2022

23. Countries: Korea
• The days of large C/A surpluses are
gone. Korea should be content with low
single digit C/As going forward (~2-3%
of GDP).
• The trade balance collapsed into
negative this year due to high oil prices.
Even with cheaper oil, the declining
semi-conductor cycle and more
generally a weak China will be a large
drag on Korea’s trade balance.
• Services account is another negative for
the BOP in 3Q this year as many
Koreans are ‘revenge-travelling’ abroad.
-5
0
5
10
15
20
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Korea current account recent trend
(10% of GDP)
China Korea
Taiwan Philippines
Indonesia Malaysia
Thailand India
Bert Gochet, Macro Hive
August 2022

24. Regions: CEMEA
• CE3 countries have been hit hard by the war next door
and the slowdown in trade with Europe. Sky-high inflation
and much weaker terms of trade have created the worst
current account trends in decades.
• The outlook for CE3 remains murky. Inflation is still
rising. While initial steps have been taken to reduce fiscal
support, current accounts may stay wide.
• The main risk for CE3 C/As is further spiralling
energy (gas) costs and/or Germany sinking in
recession.
Bert Gochet, Macro Hive
August 2022

25. Countries: Hungary
• After poor policy decisions and the energy shock
from the war, Hungary is in danger of entering a
group of ‘basket case’ countries where overheated
economies have ignited hyperinflation and a
currency decline.
• Among CE4 countries, Hungary is most at risk as:
• It imports almost all its energy (unlike Poland
and Romania).
• It is not receiving EU funds for now.
• Pre-elections, it boosted fiscal spending
sharply. Now, belatedly, it is changing tack and
moving towards austerity.
• The inflation problem appears worse than
other CE4. YE22 forecasts are for 15-19%.
• An end to the war, EU funds, and a higher MNB
policy rate would help Hungary out of this
vulnerable situation.
-8
-6
-4
-2
0
2
4
6
8
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Hungary current account recent trend
(% of GDP)
Poland Israel
South Africa Hungary
Czech Turkey
Romania
Bert Gochet, Macro Hive
August 2022

26. Countries: Czech Republic
• Among the CE-4 on a relative basis, the
Czech economy is the least unbalanced
amid the war and energy inflation.
• Despite importing practically all its energy,
Czech Republic has high reserves and has
acted relatively early to dampen its
economy from overheating (unlike Hungary
for example).
• A downside risk has appeared in the form of
a dovish new central bank governor. This
has to be watched as it is not clear that the
inflation fight has been won.
-8
-6
-4
-2
0
2
4
6
8
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Czech Republic C/A recent trend
(% of GDP)
Poland Israel
South Africa Hungary
Czech Turkey
Romania
Bert Gochet, Macro Hive
August 2022

27. Countries: Turkey
Bert Gochet, Macro Hive
August 2022
• Hyperinflation has ravaged TRY, and it is a
small miracle Turkey has not experienced a
full-blown BOP crisis yet.
• Turkish GDP growth has been saved so far
by the adaptability of its private sector and
by government compensation for domestic
TRY deposit holders. But even this dynamic
is under stress. Reserves are effectively
negative.
• If there is no change in policy, the odds for a
BOP crisis (i.e., a crash in GDP growth plus
a worse devaluation) are very high.
-8
-6
-4
-2
0
2
4
6
8
Jan/20 Jul/20 Feb/21 Aug/21 Mar/22 Sep/22
Turkey current account recent trend
(% of GDP)
Poland Israel
South Africa Hungary
Czech Turkey
Romania