The World’s Most Vulnerable Emerging Markets
Investors must understand the factors that make certain nations more susceptible to contagion in financial markets.

When a somewhat disappointing report was released on January 23 on China’s private manufacturing sector, investors viewed it as a kind of If You Give a Mouse a Cookie story. Their thinking: “If China’s growth prospects need reevaluation, then other Asian emerging economies will as well. And if other Asian emerging economies need reevaluation, then other emerging economies may also need it.”
While there is some loose logic in that, because economies are intertwined, the real problem is that such expectations become self-fulfilling prophecies. They trigger a wave of contagion that quickly spreads problems from one country to another. Indeed, the disease analogy is quite apt. In a contagion-type event, the currencies and stock markets of many countries are attacked, just as an outbreak of influenza touches people of all ages, social classes and states of health. But the virus is riskiest and most debilitating where it finds existing problems.
In this case, a currency attack on an emerging market with a severe trade deficit, a high inflation rate and a lot of debt owed to foreigners is the economic equivalent of an asthmatic child catching the flu. If a country is buying more than it produces for the world market, then more of its currency is typically going into the hands of those who don’t particularly want it, so its value easily declines. Similarly, if a country is experiencing a high inflation rate, the interest rates that it offers may not be enough to protect an investor from real declines in value. Finally, if a country owes debt to foreigners of more than two times its reserves of foreign cash, then it may have to cheapen its own currency to get foreigners to renew their debt purchases.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
So, when the report on China’s private manufacturing came out, the value of currencies of all other Asian emerging economies declined by 1% to 2% and then stopped dropping. The declines in those countries’ stock markets were similarly limited (at the time). Against them, the attacks faltered. Why? Because these countries typically run trade surpluses and will continue to do so even if growth slows in China, their most important export market. In addition, their inflation rates are moderate, so investors are not overly concerned about having to find investments that will beat the inflation rate.
However, when the wind from China brought the flu to Turkey, South Africa and Argentina, those countries’ currencies fell apart -- even though China is not their largest export market. What was different? Turkey and South Africa are vulnerable because both have large trade deficits (6%-7% of GDP) and high inflation rates (6%-8%), and debt owed to foreigners is three times their reserves. In fact, their currency values had already been declining, even before the China report. Although import controls in Argentina mean it doesn’t have much of a trade deficit, its high inflation rate (unofficially reported at 28%) and its overvalued official exchange rate make it vulnerable. Brazil, Colombia, Chile and Ukraine, among others, also have significant trade deficits and have seen their currencies decline. Hungary and Poland have been hit because of foreign debt that is four times their reserves. India and Indonesia, with high inflation, foreign debt that is two to three times reserves and trade deficits of 3%-4% of GDP, should be susceptible but have largely escaped unscathed so far, perhaps because of their recent progress in cutting their deficits.
A more recent report on China’s manufacturing sector – this time on critical government demand for capital improvements and investment -- also indicates slowing growth in the Asian behemoth. As investors and others try to gauge the impact on various emerging markets, it’s important to remember another children’s story. When the big bad wolf huffs and puffs, it matters very much whether a house is made of straw or bricks.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.
-
Georgia Could Be Latest State to Eliminate Income Taxes
State Tax Eliminating the Georgia state income tax: Last-minute summer trend or permanent policy?
-
Biggest Winners and Losers in Trump's New Tax Plan
Tax Law Trump’s mega tax overhaul, known as the ‘One Big Beautiful Bill,’ has distinct winners and losers. Which group do you fall into?
-
AI-Powered Smart Glasses Set to Make a Bigger Splash
The Kiplinger Letter Meta leads the way with its sleek, fashionable smart glasses, but Apple reportedly plans to join the fray by late 2026. Improved AI will lure more customers.
-
Breaking China's Stranglehold on Rare Earth Elements
The Letter China is using its near-monopoly on critical minerals to win trade concessions. Can the U.S. find alternate supplies?
-
What New Tariffs Mean for Car Shoppers
The Kiplinger Letter Car deals are growing scarcer. Meanwhile, tax credits for EVs are on the way out, but tax breaks for car loans are coming.
-
AI’s Rapid Rise Sparks New Cyber Threats
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
Blue Collar Workers Add AI to Their Toolboxes
The Kiplinger Letter AI can’t fix a leak or install lighting, but more and more tradespeople are adopting artificial intelligence for back-office work and other tasks.
-
Will State Laws Hurt AI’s Future?
The Kiplinger Letter Republicans in Congress are considering a moratorium on state AI laws. But it’s likely a growing patchwork of state AI regulations will be here for a while.
-
The Economic Impact of the US-China Trade War
The Letter The US-China trade war will impact US consumers and business. The decoupling process could be messy.
-
AI Heads to Washington
The Kiplinger Letter There’s big opportunity for AI tools that analyze MRIs and other medical images. But also big challenges that clinicians and companies will have to overcome.