The financial condition in the emerging economies worsened as their foreign currency debt is ranging between 20 percent and 50 percent of GDP. The stress on emerging market was building since 2013. Taper tantrum, a term coined by Morgan Stanley to describe the vulnerability of capital outflows faced by fragile five nations namely Brazil, India, Indonesia, Turkey and South Africa. Growth disguised the underlying challenges, low current account deficits, monetary accommodation, and drawing more capital are key factors seen in those markets.
The prevailing conditions of misallocation of capital in uneconomic high-end projects or financial speculation have created a textbook recipe for an emerging market crisis demanding a large amount of debt, coupled with domestic credit bubble. The critical financial situation in emerging economies is surged with a budget deficit, weak banking sector, current account gaps, inadequate forex reserves, and considerable short term foreign currency debt. Moreover, reliance on commodity exports, narrowly based industrial structures, corruption, institutional weaknesses, and miserable political and economic leadership have worsened the financial situation in these economies.
The total borrowing of the emerging markets have increased from US$21 trillion in 2007 to US$63 trillion in 2017. Moreover, since 2007, the foreign-currency debt – in euros, dollars, and yen – of these countries doubled to around $9 trillion. India, China, Indonesia, South Africa, Malaysia, Chile, Brazil, Mexico, and some Eastern European countries have foreign-currency debt between 20 percent and 50 percent of GDP.