LONDON Feb 28 Investors are marking Russia and Nigeria, where current account surpluses and reserves are slowly eroding, as the next likely victim of the rolling emerging market crisis, as well as a "double deficit club" of economies.
Rather than looking simply at a country's external reliance on capital - which prompted investors to shun the "Fragile Five" including India and Indonesia last year - markets are likely to target commodity exporters next.
This is because the slowing Chinese economy is sapping demand for their commodities, eroding their hard currency reserves and weakening their balance of payments (BOP).
"The worry about Fragile Five is done now. It doesn't tell us where we go from here. Current account positions have improved in India and Indonesia, and the China link is more important than the U.S. link," said Lars Christensen, head of EM research at Danske Bank.
"We would focus on commodity exporters. From that point of view it's natural for Russia and Nigeria to come under pressure. Growth has slowed down a lot and the interest of the (Russian) central bank is in letting the rouble depreciate further."
Russia's weakening trade and capital flight are weighing on its balance of payments, which is already exposed to external shocks in an economy highly dependent on oil and gas exports.
Balance of payments record all monetary transactions between a country and the rest of the world in current and capital accounts that include investment flows.
A net $62.7 billion of capital flowed out of Russia last year, while its current account surplus more than halved to an estimated $33 billion. Foreign reserves are down more than 7 percent from a year ago to $493.4 billion and the central bank is spending $400 million a day in foreign exchange markets.
The central bank reckons the current account surplus will disappear by 2016.
"Russia has deep structural problems... It has a negative BOP position and the rouble needs to weaken," said Neil Shearing, head of EM research at Capital Economics.
The rouble has already hit a five-year low against the dollar and record troughs on the euro.
In fellow oil producer Nigeria, foreign reserves fell to $40.68 billion as of Feb. 24, down nearly 14 percent from a year ago, as the central bank intervened in the market to prop up the naira, which lost nearly 5 percent at one point this year after the president suspended the central bank governor.
Its fiscal deficit is expected to rise to 1.9 percent of gross domestic product this year from 1.85 percent in 2013 and a decline in oil prices could worsen the gap without spending cuts, a tall order ahead of 2015 election.
DOUBLE DEFICIT CLUB
Investors have been rewarding Indonesia, which has raised interest rates by 175 basis points since June, and India, which delivered abrupt interest rate hikes in January, and both currencies have erased all their 2014 losses.
"There is more differentiation seeping through into emerging market currencies. The markets are expressing optimism that policymaker actions will bear fruit in the Fragile Five," said Manik Narain, strategist at UBS.
Morgan Stanley is looking at a "double deficit club" of South Africa, Brazil, Turkey, India, Indonesia and Ukraine, where cheap money from developed economies fuelled excessive domestic demand growth and led to strong wage increases.
But Brazil, India and Indonesia have had a head start in achieving external and internal rebalancing by raising interest rates last year to dampen domestic demand and quell inflationary pressure.
Turkey did tighten aggressively in January, leaving behind South Africa, where the interest rate hike was a more modest 50 basis points.
General elections in these countries are making it harder for governments to implement politically-sensitive spending cuts to tackle fiscal deficits, leaving the currency to almost single-handedly drive the process of rebalancing.
"In South Africa as in other double deficit club economies, monetary policy alone will be overburdened with achieving successful rebalancing if fiscal policy and external demand don't play along," Morgan Stanley's economists Joachim Fels and Philipp Erfurth wrote.
"External rebalancing should be helped over time by the significant depreciation in double deficit club members' currencies." (Additional reporting by Sujata Rao; Editing by Ruth Pitchford)