Why these emerging market taper victims can tough it out
Better-than-expected data out of India and Indonesia this week suggests the two Asian economies may be better placed to weather a tapering of U.S. monetary stimulus, analysts say.
Earlier this year panic over the unwinding of the Federal Reserve's bond-buying program hit emerging markets hard, especially India and Indonesia, which have large account deficits. Indian stocks plummeted 13 percent from late May to late August, whilst Indonesia's Jakarta Composite plunged 26 percent over the same period.
(Read more: India's turnaround is very close: Goldman Sachs)
This week, Indonesia reported a surprise trade surplus of $42 million in October, against expectations of a deficit of $775 million. Meanwhile, India reported a dramatic reduction in its current account deficit to $5.2 billion for the July through to September period, or 1.2 percent of gross domestic product, down from $21.8 billion – or 5 percent - in the same period last year.
"I think both countries are in much better positions than they were back then [in May]. But it's too early to conclude whether or not these countries are out of the woods yet," Frederic Neumann, co-head of Asian economics research at HSBC told CNBC.
Neumann said investors are still nervous about their exposure to countries with weaker trade positions and said in his view there was still a lot more work to be done.
"In the short term it's easy to compress imports, and make your trade balance look good on paper. The real test will be what happens when imports start to rise again...At the end of the day, there is lot more these countries need to do to correct their external trade positions. It's not clear policy makers have done everything in their power," he added.
Both Indonesia and India's central bank governors have taken a number of steps to bolster local markets since the taper fallout which commenced in May.
(Read more: Will Fed crush emerging markets? The big debate)
Bank Indonesia has raised interest rates by 175 basis points since then, in an attempt to shore up losses in the currency and attract more foreign investors, while the Reserve Bank of India has taken steps to curb non-essential imports like gold. India has also benefited from a stabilization in its currency, which has helped encourage foreign investors to return to the market.
Indonesia's trade deficit slimmed to 3.8 percent of gross domestic product (GDP) in the third quarter, down from 4.4 percent in the previous quarter.
Prakriti Sofat, regional economist at Barclays Capital, said she believed India had tackled the challenge more effectively than Indonesia.
"Overall we believe that Indonesia is more vulnerable than India in an environment of Fed tapering," she said.
According to Barclays research, Indonesia's current account deficit is likely to remain stubbornly high this calendar year and next, at 3.8 percent of GDP and just over 3 percent respectively.
Meanwhile, she expects Indian central bankers to have made a much more aggressive correction to their current account deficit, bringing it down from 4.8 percent of GDP in the fiscal year ending in 2014, to 2.6 percent of GDP in the following fiscal year.
"India has made more sizable improvements in its current account deficit, helped by measures to contain gold imports and weak growth leading to import compression," she said.
Other analysts told CNBC that improvements to India's current account deficits and Indonesia's trade data were helpful, but an overall change in the global economic backdrop seen over recent months, meant these countries would be unlikely to suffer such a sharp sell-off when tapering eventually happens.
(Read more: Indonesia gets ready for Fed tapering)
"These countries [India and Indonesia] handled the fallout quite well. Their central banks did a great job in the turmoil in the summer. These policies are bearing fruit," said Tim Condon, the head of research for Asia at ING Financial.
"Taper fears are still out there but they're less acute than they were last summer because people are less worried about another 150-basis-point spike in the yield on U.S. 10 year Treasury notes. So investors are more comfortable that countries with current account deficits will be able to finance them," he said.
— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie