Moody's believes the main external risk facing emerging markets is the potential for a prolonged period of emerging market risk aversion, prompted by the anticipation of the normalisation of US monetary policy and the possibility of a sharper-than-expected slowdown in China's growth. In some cases, country-specific challenges exacerbates this external risk.
According to Moody's report, the trends in global capital flows have caused Brazil and Turkey to register the sharpest exchange rate depreciation and loss of reserves in the first half of 2015, while India proved comparatively resilient to these market developments.
Overall, Turkey stands out as most vulnerable to external risks because of its high reliance on external capital and large stock of external debt due annually, combined with heightened political risks.
While Brazil is less reliant on external capital, it has already experienced significant financial market turbulence because of the country's weak growth outlook, ongoing deterioration of its fiscal metrics and challenging political landscape.
South Africa and Indonesia are primarily exposed to financial market turbulence through their trade links with China and a period of low commodity prices. If Chinese growth is slower than expected, this could delay both countries' cyclical economic recoveries and affect capital flows, says Moody's, although both countries have adequate resources to meet their needs in periods of adverse market conditions.
India, on the other hand, is less exposed to global risks because of its more resilient economic growth and the impact of positive policy reform momentum, according to the rating agency.
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