– Watch for any breach of the ‘the firebreak’ that exists between large C/A deficit and surplus countries. While the division between external deficit and surplus country performance remains stark, the current crisis will be perceived as localized, idiosyncratic and contained, rather than a broadening story of credit excesses in the developing world.
Big crises have had more innocuous beginnings, than the current ‘stirrings’ in developing markets.
In 1997, Thailand was a mere 0.5% of the global economy, yet it still managed to trigger a crisis of global proportions. True to the roots of chaos theory, Thailand’s FX asset liability mismatches were indeed the butterfly that flapped its wings creating a ripple effect through the global economy. Fast forward to 2014, where the stressed ‘fragile five’ developing countries, Brazil, Indonesia, India, South Africa and Turkey (‘the BIITS’), represent slightly more than 7% of global GDP. If this is still ‘a butterfly’ it already has 15 times the heft of the initial Thai 1997 variant, suggesting questions of global contagion are not only relevant but essential.
Read the full report: FX Daily
Deutsche Bank