THERE ARE few greater honours than becoming finance minister of your country. But there are better and worse days to start the job. Chatib Basri became finance minister of Indonesia, the fourth-most-populous country in the world, on May 21st 2013. That was only a day before the start of a financial sell-off known as the “taper tantrum”. Yields on American Treasuries rose abruptly after Ben Bernanke, then chairman of the Federal Reserve, spoke about reducing (or tapering) the Fed’s bond purchases. Higher American yields shattered the appeal of emerging markets, undermining their currencies, bonds and shares. “I had very little time to adjust,” Mr Basri noted in 2016.
Policymakers in emerging markets now fear a second such tantrum. As Treasury yields jumped at the end of last month, a broad index of emerging-market shares fell by over 7% in little more than a week. This is “shaping up to be a bruiser”, wrote Robin Brooks of the Institute of International Finance, a bankers’ group, on Twitter. Markets have calmed down in recent days. But if they again lose their composure, which emerging economies will be worst hit and why?
One way to identify future casualties is to look at the characteristics of past victims. Back in 2013 Indonesia was one of an unfortunate group of emerging markets dubbed the “fragile five” by James Lord of Morgan Stanley, a bank. The group, which also included Brazil, India, South Africa and Turkey, were all struggling with inflationary pressure, an overvalued exchange rate and a conspicuous current-account deficit (which measures a country’s trade deficit among other things). A few months into the tantrum Indonesia reported that its deficit had increased to 4.4% of GDP. The “market went into shock”, Mr Basri recalls.
Similar factors were combined into a “vulnerability index” by the Fed’s own economists in 2014. For the most part, the worse a country scored on the index, the more its currency fell in the taper tantrum. This kind of evidence has prompted Fed officials ever since to argue that the sensitivity of emerging markets to the Fed’s words and deeds depends a lot on economic fundamentals in the emerging markets themselves.
To the Fed’s critics, that can sound like blaming the victim. But it is also a hopeful message. It implies that emerging markets have some control of their own fates. They are not “purely passive objects of the effects of Fed policy decisions”, as Mr Bernanke put it in 2015. Mr Basri has recounted the numerous measures he and other policymakers introduced to make Indonesia less fragile. They narrowed the country’s current-account deficit by raising interest rates, tightening credit regulations and cutting fuel subsidies, despite the political…
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