Weekly Economic Briefings > Emerging Markets Weekly Economic Briefing

The upsurge in global financial market volatility over the last month reflecting heightened concerns about the state of the Chinese economy and increased uncertainty about currency movements following the CNY devaluation on 11 August poses a further threat to already weak near-term growth prospects in  the emerging markets. The dangers are particularly great for those countries that are very reliant on goods trade, commodity exports, run a large current account deficit or depend heavily on external funding.The continued sluggishness of the Chinese industrial sector, as shown by the weakness of exports and the PMI in August, together with the patchy performance of other sectors and a fragile equity market, suggest that the authorities will tolerate more depreciation of the CNY, and also ease monetary and fiscal policy further, in an attempt to prevent the slowdown gaining too much momentum.Over the coming months, a background of mixed Chinese data (at best), CNY depreciation and the still looming prospect of US monetary tightening are likely to prompt capital outflows and considerable volatility in commodity prices, emerging market currencies and perceptions about prospects in 2016.Brazil and Russia are two of the EM economies most likely to be affected. Both are already in deep recession with dismal structural fundamentals. Both rely on commodity exports that are extremely vulnerable via commodity prices to weakening sentiment about China. In addition, the countries are exposed to the risk of major capital outflows if investors stage a rapid retreat from risky assets which would push their exchange rates down even further, tighten financial conditions and hugely hinder the chances of escaping recession during 2016.Some other emergers who have firm control over inflation or whose long-term prospects are viewed relatively positively (India) could compensate by easing policy but Turkey, Malaysia and South Africa have no scope and could be hit hard by the mix of headwinds.