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Stormy Weather

June 22, 2018

Don’t be fooled. The high levels of volatility in emerging markets and sharp, sporadic pressures on a range of currencies, including those of Argentina, Mexico and Turkey, which holds elections on Sunday, are the opening salvos in a new period of mounting risks and uncertainties.

The tensions and challenges in developing economies that will come into ever-clearer focus in coming weeks and months are not being sufficiently recognized to provide assurances that crises will be handled well – or that contagion across the financial system will be easily contained. The financial environment that is rapidly evolving for emerging markets results from a combination of assorted factors, which could amount to a perfect storm.

A considerable number of countries have rising current account deficits – such as Brazil, India, Indonesia, Turkey and South Africa. Then, sovereigns and corporations in many emerging markets – in Latin America, Africa and, notably Turkey – have taken advantage of the abundance of global liquidity to borrow heavily in foreign currencies.

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