Saving savings to save the lira

Now that the lira and other emerging market (EM) currencies have somewhat stabilized, at least for the moment, it may be useful to try to understand why some underperformed, while others overperformed, peers.

Five are especially worth mentioning. The Brazilian real, South African rand and Turkish Lira were especially hard-hit this year. On the other hand, the Indian rupee and Indonesian rupiah have held relatively well. This difference was evident last week as well. After the Fed meeting on March 18, all EM currencies immediately strengthened against the dollar, but the next day most continued their slide against the greenback. The rupee and the rupiah still gained.

Politics definitely played a role. While President Recep Tayyip Erdo?an?s tirades against the Central Bank shaped the lira, Brazil was shaken by a corruption scandal. But it would be incorrect to put all the blame there. The consensus explanation is that the currencies of countries with the largest current account deficits were hit the hardest. After all, deficits need to be financed from abroad. U.S. monetary policy, which is also strengthening the dollar, has implications on capital flows to EMs.

This reasoning makes sense, but it is not completely supported by the data. After all, while Turkey and South Africa are expected to end the year with the first and third largest current account deficits, according to the IMF?s latest projections, Indonesia?s projected deficit is not that different from Brazil?s ? and India is not that far behind.

In a recent research note, economics consultancy Capital Economics argues that we should be worried about savings rates rather than current account deficits. They show that ?the hardest hit EM currencies over the course of...