August has been a crisis month in emerging markets (as usual), with the collapse of the Turkish lira (TRY) and sell-offs in several other markets, including Russia, which has been roiled by the US government threat of new “crushing” sanctions arriving this autumn. But just how bad have things been? The consensus is that while most markets have been affected there will be no 1997 Asian Financial Crisis-style contagion and that many markets should bounce back soon.

Asset prices in Turkey and Argentina have fallen dramatically in recent weeks, the moves seen in other countries’ markets look similar to those of previous EM sell-offs over the past decade, according to Capital Economics. The TRY has lost some 40% of its value YTD, the Russian ruble is down by about 7% and the Ukrainian hryvnia is out by about 15%. Bond markets have also been hit with spreads over US treasuries widening across the board, which spells trouble for Turkey, Russia, Ukraine and Belarus in particular, all of which plan to raise large amounts of debt across the next 12 months.

But the impact on growth for these markets remains unclear. Clearly economic growth will slow – Russia has just revised down its outlook mildly – but not by large amounts, experts say.

“It’s still very early to gauge whether there has been an economic hit, although our indicators suggest that financial conditions in EMs haven’t tightened to anywhere near the degree to which they did during the 2013 Taper Tantrum,” William Jackson, the chief emerging markets economist at Capital Economics said in a note, referring to the US Federal Reserve's decision to gradually reduce the amount of money it was feeding into the economy back then. The taper caused investors to panic. They rapidly withdrew money from the bond markets, drastically increasing bond yields.

Capital Economics looked back at the last 11 sell-offs in EM financial markets this decade caused by a currency crisis. It used a threshold of the JP Morgan EMBI spread over US Treasuries rising by 50bp or more within three weeks to define “crisis”. This captures the major sell-offs triggered by the eurozone debt crisis in 2011/12, the “Taper Tantrum” in 2013, fears of a hard landing for China in 2015, as well as the latest sell-off.

"Particularly sharp"
“What comes out of this comparison is that the sell-offs in Turkey and Argentina this time round have been particularly sharp. The falls in their currencies and rise in their bond yields (both dollar and local currency) have only been matched in scale by the declines in Russian asset prices during the ruble crisis of late 2014,” said Jackson, adding that the size of the currency falls were in line with previous crises, and the rise in local currency bond yields was larger, but the widening of spreads to US T bills was smaller.

“Overall, then, it has been a large sell-off, but perhaps not as dramatic as some headlines have suggested,” Jackson concluded.

Another conclusion is that the currencies that have done badly always do badly in crises and tend to belong to the countries with economic problems such as wide current account deficits.

However, apart from Argentina and Turkey, which have been in the front line, the other economies are not showing signs of more than a mild slowdown in growth as a result of the current crisis bout.

One way to assess the impact on economies is to look at the financial conditions and in most countries the authorities have tightened control similarly to how they did in the crises of 2014 and 2015, but less than they did during the “Taper Tantrum” in 2013. Moreover, when it comes to those countries with sound macro fundamentals, which consequently have not seen bond yields spike, they may now benefit from the weakening of their currencies. Bouncebacks are in prospect once the frayed nerves of August calm.

Russian brokers are already reporting that a sell-off in the local treasury bills, the OFZ, has led to a fall in prices, but the fall in the value of the ruble against the dollar is making these popular bills look very attractive again. Investors are holding off, however, until some clarity appears over what form the pending US sanctions will take given that the draft law in Congress targets Russia’s sovereign debt.