The capital-freeze index: Which emerging markets are most vulnerable to a freeze in capital inflows?

The capital-freeze index: Which emerging markets are most vulnerable to a freeze in capital inflows?

Sep 7th 2013 |From the print edition


*Based on current-account balance, credit growth, short-term gross external debt and external debt payments as % of reserves, and financial openness

THE risk of an abrupt end to capital inflows is now a worry for much of the emerging world. Some places are more vulnerable than others. A large current-account gap implies lots of net borrowing from abroad, which could presage a credit crunch if funding dries up. A high level of short-term external debt relative to a government’s stock of reserves means an economy lacks the means to tide borrowers through temporary difficulties. Rapid credit growth often signals overstretched firms and overvalued asset prices. A more open financial system may boost growth in the long run, but it also makes it easy for capital to flood out fast.The Economist has combined these four factors into an index measuring the vulnerability of 26 emerging markets to a capital freeze. We have used a simple traffic-light system to group the countries. Green denotes economies, including reserve-rich oil states, that are at relatively little risk from a sudden stop. A current-account surplus, a vast hoard of reserves and a closed capital account mean that whatever troubles befall China, they are unlikely to include a panicked flight of capital.

Many of the emerging world’s bigger economies lie in amber territory. India and Indonesia are already feeling the pressure. Others, like Mexico, have fared well amid recent turmoil: the peso has been roughly flat over the past year. But credit growth and high levels of financial openness are potential points of fragility. Malaysia and the Philippines, victims of the Asian crisis of the late 1990s, are in better shape now. Both run current-account surpluses and have built up a much larger reserve buffer relative to short-run external obligations. Yet credit growth has also been zesty.

Countries in the red zone are most at risk. South Africa, Ukraine and a clutch of Latin American countries all look vulnerable, but Turkey tops the list. It is running a current-account deficit of over 6% of GDP, its short-term external debt and debt payments amount to over 150% of available reserve assets, and since 2009 credit has grown faster there than it has in any other emerging market in the index. The Turkish lira has already fallen by 13% against the dollar since the start of the year, but it may yet sink further.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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