Those with external imbalances, a reliance on external funding, and weak policy frameworks will remain vulnerable to sentiment changes, capital flow adjustments, or disorderly market reactions.
Specifically, in the past nine months, much of the emerging market volatility has been in anticipation of, and following the commencement of, the US Federal Reserve's unwinding of extraordinary monetary stimulus (so-called "tapering" of its quantitative easing policy). The volatility apparent earlier this year was also exacerbated by emerging market growth concerns sparked by weakening Chinese manufacturing data.
In this context, Moody's has released a compendium which provides a point-in-time snap-shot of exposures to capital flow adjustments and disorderly market reactions for some of the largest emerging market sovereigns, along with mitigants that support creditworthiness and provide capacity to manage external financial and economic shocks.
For Asia Pacific, the compendium looks at China, India, Indonesia, Korea, Malaysia, the Philippines and Thailand.
According to the report, key indicators of external vulnerability include a large current account deficit; low foreign exchange reserves relative to short-term and maturing long-term debt (producing a high external vulnerability indicator); large government gross borrowing requirements; and high foreign currency denominated debt as a proportion of total general government debt.
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Indicators of sovereign "policy space" to manage potential external financial and economic shocks include CPI inflation and the amount of general government debt as a proportion of GDP.
With China (Aa3 stable), Moody's believes that its capital controls, strong external balance sheet, and robust current account surplus insulate the economy and reduce financial system vulnerability to global financial market disturbances. Moreover, neither the government nor banking sector relies on external funding.
With India (Baa3 stable), signs of a decline in its high current account deficit as a percentage of GDP and the makeup of the government's debt profile limit the extent of sovereign exposure to global financial market volatility. But continued higher inflation poses risks.
With Indonesia (Baa3 stable), its reliance on foreign funding poses risks, but the presence of sizable buffers and considerable policy space offers capacity to manage the effects of global financial market volatility. Moreover, its debt profile continues to improve, mitigating currency and refinancing risks, and supporting creditworthiness.
With Korea (Aa3 stable), its strong external position -- which includes a strong current account surplus -- low level of government foreign-currency debt, and low domestic-currency external debt reduce the vulnerability of the government's balance sheet to global financial market turmoil and exchange rate volatility. But the banking system has a high dependence on wholesale funding in foreign currencies.
With Malaysia (A3 positive), its strong external position and large pool of domestic savings limit vulnerability to external financial shocks. Nevertheless, net portfolio inflows into Malaysia during 2010-12 surpassed the accumulated total of the previous decade, representing potential vulnerability to a sudden stop or reversal of these flows.
With the Philippines (Baa3 positive), its financial account has registered strong inflows since 2010, prompted by extraordinary monetary easing in advanced countries, especially for portfolio investments. However, while subject to potential deceleration or reversal, these capital flows do not pose as large a vulnerability as in some other emerging markets. In addition, the country's external strengths are reflected in the falling external debt-to-GDP ratio and the ample stock of gross international reserves, which now exceeds the country's total external debt.
With Thailand (Baa1 stable), the sovereign has low external vulnerability, with a very small current account deficit, low external vulnerability indicator, favorable government debt structure, and substantial policy space, if required, to respond to the deleterious effects of a potential emerging market crisis. Nevertheless, the ongoing political crisis is having a negative effect on key sovereign credit metrics, slowly undermining some of the sovereign's traditional buffers.
Moody's compendium which offers a look at many of the key emerging sovereigns covered by Moody's in Asia Pacific, the Americas and EMEA more generally says that continuing global capital reallocation has driven considerable exchange rate depreciation in recent months and rises in market yields, particularly in those emerging markets that were the recipients of large amounts of foreign capital inflows during the quantitative easing period, such as Turkey and South Africa.
Others, such as Ukraine, Argentina and Venezuela, have come under greater pressure, underscoring a diversity of vulnerabilities and exposures beyond just external factors and differentiation by the market regarding its assessment of an individual sovereign's inherent mitigants to vulnerability and credit supports.
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