The runaway U.S. dollar is putting many emerging markets in a precarious position, warns Oxford Economics, identifying Malaysia, Chile, Turkey, Venezuela and Russia as the most vulnerable.
"A simple textbook view of the issue might be that a rise in the dollar's value could be good for emerging markets as it would improve their export competitiveness vis-à-vis the U.S.," Adam Slater, senior economist at Oxford Economics wrote in a report.
"[But], there are a number of channels through which a stronger dollar may damage growth in emerging market countries," he said, noting it increases the burden of dollar-denominated debt, lowers commodity prices and chokes off capital inflows.
The dollar rose 12 percent on a trade-weighted basis between June 2014 and March 2015. Dollar rallies of this scale are rare, says Oxford Economics. Aside from the brief but violent surge during the financial crisis of 2008-09, the last spikes were seen in the late 1990s and early 2000s.
"It can give rise to negative balance sheet effects that damage emerging market growth. This is especially the case where there are substantial mismatches between the dollar liabilities and assets of corporates, banks and governments in[emerging markets]," said Slater.
Venezuela, Russia, Brazil and Colombia, Turkey and Chile are most at risk in this area, according to Oxford Economics.
Falling commodity prices
A rising dollar is also linked with falling resource prices, a negative for commodity-dependent emerging markets.
Alongside the dollar's 12 percent rise between June 2014 and March 2015, oil prices, for example, plummeted 50 percent.
Of course, declining commodity prices are not a headache for all emerging markets, with several large economies in Asia including China, India, Korea and Taiwan reaping the benefits of lower energy costs.
But in Russia, Chile and Venezuela net exports of primary commodities account for some 17 percent of gross domestic product (GDP). Dependency is also high in Malaysia, Argentina and Colombia, where commodity exports make up 8-9 percent of GDP.
Decreased capital flows
Another channel through which a strong dollar can hit emerging market is through decreased capital flows.
"Simply put, the argument runs that a strong dollar (and the rising dollar interest rates that may be behind it) will attract capital away from [emerging markets] and into U.S. assets," Slater said.
"This will weaken emerging currencies and potentially tighten monetary conditions by forcing up interest rates or draining banking system liquidity in emerging market countries," he continued.
There is some evidence that funding conditions for emerging market banks are deteriorating, said Slater, citing a survey of emerging bank credit conditions by the Institute of International Finance, which showed a rise in funding costs in the fourth quarter of 2014.
However, the situation is not yet alarming, he noted. "The latest survey results in this area are not as negative as they were even in mid-2013. There are few signs yet of the intense pressures on dollar funding markets visible in say 2008-09."
Slater identified Malaysia, Chile, Turkey, Venezuela and Russia as the most at risk from a stronger greenback based on six key indicators.
These include net commodity exports as a percentage of GDP, inflation, private debt as percentage of GDP, total external debt as a percentage of GDP, short-term debt as a percentage of FX reserves and the debt-weighted exchange rate moves since mid-2014.
By the same measure, he says Korea, Taiwan, China, India, and the Philippines are the least vulnerable.