via
A crisis that has hit some emerging markets risks spreading through the world economy, according to a global investment trade body.
Many countries are increasingly vulnerable to economic shocks following the debt sell-off which has hit Argentina and Turkey, a report from the Institute of International Finance (IIF), has found.
Lebanon, Colombia and South Africa have the potential to act as a “channel for contagion” to the broader emerging market economy, according to the IIF.
As global financial conditions tighten due to rising interest rates, led by the US Federal Reserve, levels of foreign-owned debt have risen to heights not seen since 2013.
That coincided with the so-called taper tantrum, when investors were spooked by the US ending its money printing efforts. If investors suddenly lose confidence, it could leave emerging markets vulnerable, and trigger a debt sell-off.
The Turkish lira and Argentinian peso have weakened sharply, reflecting “idiosyncratic factors” the report warned. The lira has fallen by nearly 17pc against the dollar while the peso has lost more than 18pc of its value.
Both economies have been heavily dependent on borrowing from foreign sources in order to fund growth, a factor common to many emerging markets, leaving them in danger of so-called capital flight if there is a sudden loss of confidence in their markets.
The higher the reliance on foreign investment, the more vulnerable the economy to shocks. Fear is now building that mounting geopolitical uncertainty will lead investors to pull their funds out of riskier emerging markets and into traditional safe havens such as US treasuries.
Turmoil has arisen in the eurozone due to political developments in Spain and Italy, raising fears for a return to a similar crisis to that seen in 2011. During this time there was significant economic damage to emerging market economies thanks to falling trade with the bloc.
Concerns about a global trade war have also hit markets, after the US pressed ahead with tariffs on metals imports from its allies.