Source: Reuters, October 26th, 20261
Capital Economics, a London research firm that sells economic analysis to investors, says most emerging markets can absorb this year's energy shock and higher global bond yields. Its October 29th monitor, written by Liam Peach, a senior emerging markets economist at the firm, names Turkey and Egypt as the main oil importers with high currency risk2. In Turkey the central bank, led by Governor Fatih Karahan, sets the response. In Egypt the government and the International Monetary Fund (IMF), which lends to governments and backs Egypt's reform program, share it3,4.
Two other risks sit outside the oil story. Turkey stands alone at high banking crisis risk, and sovereign debt risk is most pressing in parts of Latin America and rising across Emerging Europe from low levels2. Brazil gave a live example. Its president, Luiz Inácio Lula da Silva, won re-election on October 25th, and the benchmark stock index fell 13.9% the next day1.
Exposure needs sorting country by country, not by the label emerging market. The public summary does not say what drives the Turkey banking rating, so this piece reads the Turkish central bank's own figures beside it and marks each place where that reading is Vektora's inference.
Capital Economics publishes a monitor of financial risk in emerging markets (EMs) built on its own indicators for currency crises, banking crises and government debt2. The full October edition sits behind a subscription. This piece uses the public summary.
Our aggregate EM currency crisis risk indicator remains well below its long-term average, EM banking risks have eased slightly over the past year and acute sovereign debt vulnerabilities remain concentrated in a relatively small group of countries.
Capital Economics2
| Group | Capital Economics reading |
|---|---|
| Most emerging markets | Well placed to withstand rising energy prices and higher global bond yields2 |
| Turkey | Net oil importer with high currency risk, and the only country at high banking crisis risk2 |
| Egypt | Net oil importer with high currency risk, with improved policymaking giving support2 |
| Parts of Latin America | Sovereign debt risk most pressing2 |
| Emerging Europe | Sovereign debt risk rising, from low levels2 |
Brazil, the Latin American case in this piece, sits outside the frame. Borders: Natural Earth. Crimea is shown as Ukrainian territory under Russian occupation. Other occupied areas are not drawn.
Sources: Capital Economics, October 29th, 20262; Capital Economics, October 8th, 20265
The firm's other notes this month point the same way. A note dated October 28th says outflows from EM bond and equity markets continue, made worse by Brazil's election and the threat of a downgrade2. A note dated October 19th names Brazil, South Africa and Hungary as major EMs with underlying fiscal vulnerabilities2.
The energy shock is still running. BlackRock's Investment Institute, the research arm of a large asset manager, wrote on October 26th that renewed attacks on energy sites and shipping in the Gulf are testing supply buffers that are thinning6. It said Brent crude, the global oil benchmark, hit a six-month high the week before6. Oxford Economics, a forecasting firm, expects major central banks to keep tightening in coming months7.
TurkeySaid on August 13th that the bank would keep policy tight and use all its tools to reach price stability3.
Egypt's lendersActing chair of the IMF Executive Board's July 30th review of Egypt. He said important vulnerabilities remain4.
BrazilRe-elected on October 25th. Investors want a credible fiscal plan from him, the emerging markets chief investment officer at UBS Global Wealth Management told Reuters1.
Capital Economics calls Turkey a main net oil importer with high currency risk, even if improved policymaking has supported it2. It adds that Turkey stands alone at high banking crisis risk2. The central bank gave its own account on August 13th, in a briefing on its inflation report3.
Governor Karahan said war-related supply shocks had slowed disinflation, and that energy imports rose because of high prices3. Annual consumer inflation stood at 31.8 percent in July3. The policy rate is 37 percent, after a cut of 100 basis points in January and a hold since early March3. A basis point is one hundredth of a percentage point.
The bank also describes steps aimed at the banking system. It sets growth limits on loans and runs rules that raise the share of lira deposits3. Total loan growth fell from 34.6 percent at the end of February to around 25 percent3. The lira share of deposits rose to 62 percent3.
Annual growth, percent
Source: Bank for International Settlements (speech by Fatih Karahan), September 1st, 20263
Capital Economics does not say in its public summary why it rates Turkish banks high risk. Credit limits and deposit rules are consistent with authorities managing strain in the system. That is Vektora's inference, not the firm's reasoning.
The same speech offers evidence on the other side. The central bank said the current account deficit, the gap between what Turkey earns from and pays to the rest of the world, stayed below its historical average in the second quarter3. It expects the ratio to stay below its long-term average in 20263. Gross reserves rose from US$155 billion on March 27th to US$185 billion on August 12th3.
US$ billion
Source: Bank for International Settlements (speech by Fatih Karahan), September 1st, 20263
The August 13th briefing is the latest official account in the stored sources. It predates the October rise in oil prices, so the figures above may have moved since6.
Egypt is the second oil importer on the Capital Economics list. On July 30th the IMF's Executive Board completed its seventh review of a loan arrangement known as the Extended Fund Facility. Egypt could draw about US$1.5 billion at once, plus about US$272 million under a separate resilience arrangement4.
The IMF said Egypt faced the war from a stronger position than in earlier episodes of external stress, and that the economic impact stayed relatively contained4. It put the current account deficit at 4.5 percent of gross domestic product (GDP, the annual output of the economy) in fiscal year 2025/264. It projects inflation rising to 16.7 percent in the second half of 20264.
The IMF also kept a warning on file. Deputy Managing Director Nigel Clarke said important vulnerabilities remain, including elevated public debt and a large role for the state in the economy4.
EnterpriseAM, an Egyptian business news outlet, reported on October 26th that an IMF mission had arrived in Cairo to start the eighth and final review of the US$8 billion facility8. Clearing both reviews would unlock about US$2.3 billion8. The program expires on December 15th8. A government official told the outlet that Egypt has frozen fuel prices through the end of December and skipped two increases it had agreed in the seventh review8.
The same outlet reports that the Egyptian pound is weakening past 55 to the dollar, and that foreign investors are net sellers of local debt8. Capital Economics singles out only Turkey for banking risk2. On this evidence, Egypt's pressure point is the currency and the cost of energy support.
Brazil is the Latin American test case. Reuters reported that Brazilian stocks and the real posted their sharpest losses in years on October 26th, reversing bets on a right-wing win1. Lula's team says it aims for a budget surplus of about 1.3% of GDP by 20301. Divya Singaravelu, head of research at Meridian 1305 Capital, said Lula has not given details of how the spending cuts would work1.
Moody's, a credit rating agency, rates Brazil's external sovereign debt Ba1, one level below investment grade, with a stable outlook1. William Foster, its lead Brazil analyst, said pressure for a negative outlook could build if debt rises without a credible plan to cut deficits1.
None of this runs through the oil bill. The IMF said in March that Latin American commodity producers such as Brazil and Ecuador can absorb market stress better, though they are not immune to higher risk premia11. Brazil's exposure is its debt and its politics, which fits the Capital Economics split.
Capital Economics' October 28th note named Brazil's election and a possible downgrade as pressures on capital flows2. The public summary of the monitor does not show how much of the Brazil move its debt indicator captures. Investors are now waiting for Lula's finance minister pick, due in coming weeks, as the first test of his fiscal plan1.
Reuters reported on May 7th that Romania's budget deficit last year was 7.9% of GDP, the highest in the European Union12. It said Poland's deficit is close to 7% and that S&P Global Ratings, a credit rating agency, downgraded Slovakia in April over its deficit12. Hungary's new government said its deficit could widen to nearly 7%12.
Karen Vartapetov is S&P's lead analyst for sovereign ratings in Central and Eastern Europe. She said the energy shock and related support measures will likely add pressure to budgets. Those budgets are already stretched by defense spending and social transfers12.
On October 8th Capital Economics expected Hungary's government to publish a fiscal review that month with a 2027 deficit projection around 5.5% of GDP, down from more than 7.0% this year5. It called that roughly the minimum adjustment needed to avoid a negative market reaction, and said a target below 5.0% could help compress bond spreads5. We could not confirm the published figure by October 30th, so that test is still open.
Deficits of this size sit awkwardly beside the phrase from low levels in the monitor2. The public summary does not say what the phrase measures, so the gap stays open.
A fair objection is that the split is too gloomy for importers. State Street Investment Management, an asset manager, wrote on October 6th that this energy shock is smaller than in 2021 to 2022 and that emerging-market central banks start from stronger positions13. The IMF called Egypt's hit relatively contained4. Turkey's central bank reports rising reserves3.
Capital Economics does not dispute this. Its own summary says most countries are well placed and that improved policymaking has supported Turkey and Egypt2. The disagreement is narrower. It is whether the exceptions carry enough weight to matter for a portfolio.
On Brazil, Citigroup said the market was long going into the election, so an overshoot on the way down was plausible10. That argues the first-day move may overstate the lasting damage. The public record cannot settle either point yet.
Confidence is medium that risk is concentrating by energy balance and fiscal starting point and not moving as one bloc. The Capital Economics summary, the IMF's Egypt review, the Turkish central bank's figures and Brazil's market week broadly point the same way. Confidence is low on why Turkey rates high for banks, because that rests on the subscription-only monitor.
Our reading is that currency risk sits with the oil importers, Turkey and Egypt, while debt risk sits where deficits and politics set borrowing costs, as in Brazil and parts of Emerging Europe. The strongest alternative is that the energy shock drives all of it through different channels. On that view the split is one story told in two currencies, and a further rise in oil would lift risk everywhere with a lag6.
Each item above is a dated test that would strengthen or weaken the call.