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The latest vulnerability scorecard shows Turkey, South Africa and Malaysia as the most fragile economies, with Turkey's situation deteriorating further over the last month because of a worsening inflation outlook and a re-acceleration of credit growth over the last four or five months. In South Africa, low real interest rates and large external imbalances remain key vulnerabilities. At the other end of the spectrum, Korea, Thailand and India (replacing the Philippines this month) score as the least vulnerable.
Since April 2016 the relative rankings of Brazil and Russia have improved the most. In April last year, the scorecard suggested that Brazil was the most risky large EM, but the subsequent impeachment of President Rousseff facilitated a huge change in economic policy and a resurgence of market confidence, paving the way for dramatically lower inflation, easing monetary policy, planned fiscal consolidation (which now must be credibly delivered) and an eventual economic recovery. In addition, the country's banking sector is much less stretched than it was a year or so ago.
Russia's improvement in the rankings has, in part been driven by the stronger oil price outlook than seemed likely eleven months ago, helping both the government's fiscal position and the escape from recession. But the inflation outlook is also noticeably better, helped in part by a stronger rouble. However, the exchange rate may now be overvalued, but central bank intervention in the FX market will likely limit further strength over and above what would be implied by oil prices.
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