August saw large drawdowns in emerging markets, reminiscent of the trend seen in the second quarter, as assets sold off over a number of factors, most notably the deteriorating economic situation in Turkey.
Turkey’s vulnerability was not entirely a surprise given the deteriorating fundamentals: severe external debt imbalances with a high reliance on foreign portfolio flows to fuel economic growth; significant inflation pressures worsened by a depreciating lira; a poor central bank reaction function and governance issues around government involvement; high private sector debt…. the list goes on.
Geopolitical tensions beyond Turkey also fuelled the wider sell-off. New US sanctions imposed on Russia sparked market speculation over additional US measures including a blanket ban on new sovereign bond purchases. Other EM countries with debt vulnerabilities, poor current accounts, inflation concerns and heightened political risk came under pressure, particularly their currencies.
