Click here to read the full report.

We have completed our annual 27-country EM heatmap exercise (see Han Teng Chua and Daisy Sharma’s detailed publication here). Macroeconomic vulnerability assessment across time and geography is an essential part of analysing portfolio risks, ratings assignment, crisis prediction, and tracking the likely path of market contagion. Whether it was in the period leading up to the 1997 Asian Financial Crisis or the 2008/09 Global Financial Crisis, vulnerability indicators like exchange rate misalignment, external buffers, system-wide leverage, and fiscal position were as useful as momentum metrics like asset price froth and credit growth in determining the depth and path of the ensuing distress.

We track Asian economies on a day-to-day basis through a myriad of indicators, but looking at within-country or within-region vulnerability ignores the fact the global investors don’t look at Asia as an asset class. Vast sums of investment go into funds under the heading of EM. When interest rates rise in the US or when the Chinese renminbi sells off, the impact of such events manifest in portfolio rebalancing that occurs across the EM space.

In our exercise, we look at 27 key EM economies and assess their macro position across a variety of vulnerability indicators. The analysis is both cross section and time series, and the rankings obtained are usefully visualised through a heatmap. Key indicators are foreign exchange reserves, fiscal balance, private and public sector debt, external (hard currency) debt, savings-investment balance, gross external funding requirement, and real exchange rate. We examine the evolution of these indicators across cross section and time series data, which allows us to glean shifts in relative vulnerability.

Key findings:

Vulnerabilities in many EM economies have worsened in recent years from weaker public finances, increases in already elevated debt levels, while uneven reserve coverage for foreign obligations and exchange rate gaps persist. Brazil, Argentina, Colombia, Chile, Egypt, Hungary, and South Africa sit at the bottom of our rankings.

These economies exhibit a combination of weak reserves and low coverage of foreign obligations, high government debt due to persistent fiscal deficits, unfavourable savings-investment balances, and in several cases, sizeable currency misalignments. In contrast, Peru continues to rank near the top, highlighting its resilience relative to vulnerable Latin American peers. This is underpinned by strong external metrics - high reserves coverage and low external debt – alongside low government and private debt, and a moderate savings-investment surplus.

EM Asia continues to be relatively healthy. Taiwan, Vietnam, Thailand, and South Korea rank among the strongest performers. Taiwan retains the top position, driven by a very large savings-investment surplus, strong reserves, and low public and external debt, despite elevated private debt. Vietnam’s strong #3 ranking reflects favourable external metrics, including a high savings-investment surplus, low external debt, and minimal currency misalignment, as well as low government debt, despite high private debt driven by rapid credit growth. Conversely, China, India, and Malaysia lag within Asia, mainly due to high private and/or public debt burdens. However, China benefits from healthy external metrics, while Malaysia’s weaknesses are partly mitigated by a positive savings-investment balance, limited currency misalignment, and a narrowing fiscal deficit.

Energy exporters remain clustered at the stronger end, including Middle Eastern economies (UAE, Qatar, and Saudi Arabia), and Russia. Their favourable rankings are supported by relatively low government debt, healthy external buffers in reserves and savings and investment surpluses, as well as generally limited currency misalignment. However, the Middle East conflict, which has yet to resolve despite the interim peace deal, poses uncertainty to their outlook, particularly as energy supplies are disrupted.

Within Asia, trend over time is mixed. Vietnam has improved steadily to its current ranking, driven by broad-based progress. Thailand’s position has also improved, underpinned by stronger external metrics and lower private debt, despite rising overall public debt used to support lagging growth. Indonesia has slipped after a few years of stability, as public finances weakened and currency misalignment widened, while Malaysia has not shifted materially.

China has weakened gradually over the past three years, driven by high and rising private debt and worsening public finances. India’s ranking has remained broadly stable, driven by steady reserve metrics, and improvements in the savings-investment balance and public finances, despite higher external and private debt.

Click here to read the full report.