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India has raised interest rates even as its economy has slowed.
Bloomberg News

Doctors don’t like to prescribe antibiotics unless they’re really necessary. Sometimes, though, it’s best to take your medicine at the first sign of trouble.

The latest round of unrest in emerging markets, sparked by evidence of slower growth in China and a currency devaluation in Argentina, shows that those countries that took harsh and thorough measures after last year’s taper-related selloff have distanced themselves from peers that have done less to correct economic imbalances.

For Asia—which suffered disproportionately in last summer’s generalized selloff from emerging markets—that’s good news. India and Indonesia, the hardest-hit countries in the region, raised interest rates even as their economies slowed, and took long-overdue structural reforms. Others that were in investors’ gunsights, such as Malaysia, slashed subsidies and staggered imports to improve the national accounts.

The cost has been a sharp slowdown in growth, and there’s no guarantee that there won’t be more troubles down the road. For now, though, that tough medicine has helped Asia weather the latest emerging-market turbulence with only minor disruption. Now, it’s non-Asian markets such as Turkey, South Africa, Argentina and Brazil that find themselves on the firing line.

Turkey and South Africa “still have roughly 7% of GDP current-account deficits, while Argentina’s FX reserves are comparatively low,” Credit Suisse economist Robert Prior-Wandesforde said in a research note.

Danske Bank, in a research note, identifies several key factors linking countries hardest-hit by the latest turmoil: “Those with large external imbalances (such as Turkey and South Africa), commodity-exporting countries (like Brazil and Russia) and countries with rising domestic political/regime uncertainty (such as Ukraine and Turkey).” Note that there isn’t an Asian name among them.

Turkey was forced to radically raise benchmark interest rates Wednesday morning—including a jump to 12% from 7.5% in the overnight lending rate—to stop the bleeding in the lira. By contrast, India’s central bank lifted its benchmark repo rate Tuesday by just a quarter-percentage point, and more to bring down inflation than to counter any market rout.

While the trade balance over the past three months has improved significantly in India and Indonesia from a year earlier, it has continued to worsen in Argentina and Turkey and has strengthened only marginally in South Africa and Brazil, according to Credit Suisse.

Moreover, Argentina, Brazil and Turkey have continued to burn through their foreign-exchange reserves—a key buffer against emergencies—since the taper selloff began last May. That metric has also worsened slightly in Indonesia, where the central bank has fought fiercely to defend the rupiah, but has improved significantly in India.

Nearly all the key emerging-market economies are facing higher inflation, which isn’t surprising given the tumble in their currencies since last May. But another metric where Asia shines by comparison is its reduced dependence on foreign investors, with the percentage of bonds held by foreigners dropping across the continent—by as much 4.4% in Malaysia.

That leaves these economies less exposed to swings in market sentiment than, say, Brazil and South Africa, where Credit Suisse data show the percentage of foreign bond ownership to be significantly higher than it was eight months ago.

Granted, that’s largely because of how rapidly foreigners sold Asian bonds on the first hints of Fed tapering last summer. That was some harsh medicine back then. But it does mean that this time around, the emerging-market selloff is, by and large, not an Asian phenomenon.



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