Richard Jerram, Chief Economist, Bank of Singapore Member of OCBC Wealth Panel

• Contagion centred on poorly-run countries
• DM and Asia look resilient
• No impact on Fed policy – hikes continue

Developed economies do not have much to fear from the troubles facing Turkey, as economic and financial linkages are relatively weak. However, some emerging markets are being caught up in the contagion.

The basic way to avoid the risk of contagion is to run your economy well. Large current account deficits, high inflation, excessive external borrowing or over-valued exchange rates create a vulnerability that can be exposed when rising US interest rates create uncertainties over access to funding.

This has been the story for many emerging markets crises in the past, where financial markets differentiated relatively efficiently. Most recently, stress was seen with the Taper Tantrum of 2013, when a small group of countries with wide external deficits came under pressure as markets worried about premature Fed tightening.

In some cases that experience triggered a policy response that has reduced vulnerability to the current crisis – as illustrated by the reduction in current account deficits (although Argentina is a new member of the pack). Our currency strategist has pointed out that markets are already focusing on countries with similarly weak fundamentals.

The good news is that there are not many countries with a serious current account deficit, and Asia looks particularly resilient. In contrast to two decades ago, before the Asian Financial Crisis, prudent economic management has led to far less vulnerability.

Indonesia is the only Asian economy with a meaningful deficit and it has tried to get ahead of market pressure by pre-emptively raising interest rates (125bps since April, including the move this week). Turkey did exactly that in early 2014 when its currency was under pressure, but political constraints have prevented a similar response this time around, and TRY has suffered accordingly.

Presumably when it has exhausted all the other possibilities, Turkey will do what is necessary – deport the US pastor, tighten fiscal policy and raise interest rates, but there is no telling how long that might take.

However, there is a broader point that even after Turkey takes remedial steps, and short-term pressures abate, the underlying problem of rising US interest rates will remain. This means we will continue to see periods of calm punctuated by bursts of stress, centred on poorly-managed economies.

None of this is likely to trouble the Fed too much. As long as EM stress is contained to a small part of the global economy – and it should be – then it will have minimal impact on the US. The Fed recognises that delaying the firstrate hike in 2015 due to uncertainty over China was a mistake. Turkey and a handful of other miscreants are much less important than China, so the Fed will maintain its gradual tightening path in response to domestic pressures.