Chart Alert: Which emerging markets are most vulnerable to changing capital flows?


Chart Source: International Institute of Finance

India's international position is a potentially precarious one. Why? Because we are sitting on a chronically high current account deficit, which is more than made up by large capital flows from abroad - at present. However, India saw an alarming situation of a sharp depreciation in the rupee, largely unhelpful trade patterns and uncertain capital flows in the recent past, bring the CAD back into focus. But India is not the only country experiencing this vulnerability, there are other emerging markets that have seen a similar scenario.
Check out the chart above that graphically captures countries' external sector vulnerability. It measures current account as a proportion of GDP on the X axis and Currency Depreciation since May on the Y axis. Countries with CAD are naturally on negative of the X axis or the left-hand side of the Y axis while countries with CAS are on the positive of the X axis and on the right hand side of the Y axis. Similarly countries that have seen currency depreciation are in the positive Y axis or above the X axis and countries with an appreciating currency are negative of Y axis or below the X axis. 
By this representation, countries in the upper left hand quadrant i.e. with a CAD and depreciating currency are among the most vulnerable and those in the lower right hand quadrant i.e. with CAS and an appreciating currency are least vulnerable or strongest. India has among the highest CADs as a percentage of GDP and has also seen a high currency depreciation. Only Indonesia has seen a higher currency depreciation, but its CAD is still lower than India's as a percentage of GDP. Similarly, Turkey and South Africa have a higher CAD/GDP percentage, but less currency depreciation. 
While India's currency has also started recovering from a sharp bout of depreciation, the objective overtime would be to get from the upper left hand quadrant to the lower right hand quadrant. A place occupied only by South Korea so far, with China at the fence with respect to currency, given that China does not have a real floating exchange rate.  
Check out a story on this aspect in Financial Times, here

No comments:

Post a Comment