The IIF has also pointed out that at the start of 2018 many EM currencies were overvalued, and therefore vulnerable. Its models now show that after the large currency depreciation across the spectrum, led by Argentina and Turkey, the EM landscape has become less vulnerable with "only moderate overvaluations remaining for India, Indonesia and South Africa."
Brazil is another EM to keep an eye on. The country is running a fiscal deficit — although mostly domestically funded — that is twice the size of Argentina's; it has now run five consecutive primary deficits. With growth in Brazil having stalled in the run-up to October's elections, TS Lombard analysts Elisabeth Johnson and Larry Brainard have sounded the alarm. "Unless the new administration moves quickly to pass a credible fiscal programme, Brazil runs the risk of following down the same path as Argentina and Turkey," they said.
Often, EM currency crises evolve into political crises, or vice versa. In Turkey's case, its central bank took steps toward reaffirming independence by delivering a larger-than-expected 625 basis point hike at last week's meeting, although President Recep Erdogan was quick to point out that his "patience is being tested by higher interest rates." In Argentina, attention has now shifted to the size of its International Monetary Fund (IMF) program, which, once agreed, should remove external funding concerns over the next year or so.