Emerging markets have dominated global growth for the last 20 years. In the long run, they will almost certainly continue doing so. But the flood of emerging market bond issues in 2014 points to a key vulnerability in that growth.

 Many emerging market countries are becoming dependent on that flood of bond money, and in any kind of downturn or credit crunch they will suffer a severe crisis. Wise investors wishing to invest in individual markets will therefore look carefully at countries’ balance of payments, to find those markets least vulnerable in a credit crunch or economic downturn.

 In the Global Income Edge portfolios we carefully screen our holdings so they are not exposed to emerging market risks, but are well-diversified and can tap emerging market growth while avoiding their pitfalls. This is the safest way to tap income from emerging markets, but for those who wish to take on more risk or are interested in what may be ticking sovereign time bombs around the world, please read on.

 Emerging market sovereign and agency bond issues volume rose 39% to $68 billion in the first half of 2014.  The recent surge in issue volume has allowed marginal borrowers to run large current account deficits. In other words, the money that comes in through bond issues is spent by the government or consumers on imports (or deposited in Swiss bank accounts) and flows right back out again.

 For example Senegal, which borrowed $500 million for 10 years at 6% and Kenya, which tapped the markets for no less than $2 billion, are both expected to run deficits of over 7% of GDP in 2014, according to the International Monetary Fund.

 The 2008 to 2009 crisis showed that emerging market bond flows are highly dependent on how much money is available around the globe. The credit crunch caused by the crisis caused volume of emerging market bond issues to drop by half from 2007 to 2008. Trading volume dropped by a third.

 Given this history, we know that at some point bond market flows to emerging markets will dry up, and that emerging markets with lower credit quality will be severely hurt. Emerging markets with balance of payments deficits won’t be able to finance them, and the values of businesses in those countries will collapse.

 Wise investors will search for countries with current account surpluses, likely to be less affected by a funding withdrawal. A credit crunch will affect trade flows also, so that countries heavily dependent on oil or another commodity may see their balance of payments deteriorate rapidly. Even so, they start from a position of strength and their liquidity will allow them to benefit from other countries’ difficulties.

 Apart from some heavily oil dependent economies, the IMF lists 15 countries expected to run current account surpluses in both 2014 and 2015. Of the four BRICS, Russia and China are among them, though Russia’s political shenanigans and China’s potential bad debt problem make them unattractive.

 Other countries such as Uzbekistan, Kazakhstan, Vietnam, and Bolivia suffer from poor governance, while Gabon and Trinidad and Tobago remain highly dependent on commodities, and Croatia’s current account surplus derives from its lengthy recession.

 However Malaysia, Philippines, Vietnam, Hungary and Nigeria all have decent growth and current account surpluses, and are not sucking in debt capital at high rates. These are the emerging markets that combine decent growth with less risk, and are the ones to concentrate on. Of these countries two, Philippines and Malaysia, have substantial stock markets with country ETFs trading on the New York Stock Exchange.

Malaysia is expected by the IMF to grow at 5% in 2014 and 2015, with a current account surplus of 4% of GDP in both years. It’s considerably richer than Philippines, with a GDP per capita of $17,500, and a highly skilled workforce putting it firmly in the middle income bracket. Its ETF is iShares MSCI Malaysia (NYSE: EWM), larger at $700 million and with a slightly lower expense ratio at 0.51%. The P/E is also slightly lower at 16 times and the yield is 3.2%, very satisfactory in current markets. Top sectors held are financial services (33%) consumer cyclical (15%) and communication services (12%).

 Philippines is expected by the IMF to grow at more than 6% in 2014 and 2015, as it has done for several years, with current account surpluses of around 3% of GDP each year.. However its GDP per capita is still only $4,700, so its labor costs are highly competitive. Its ETF is iShares MSCI Philippines (NYSE: EPHE), but unfortunately this is uninteresting for income-seeking investors, with only a 0.8% yield.

 However if you want a Philippine exposure, there’s a much better income-oriented bet, in Philippine Long-Distance Telecom (NYSE: PHI). This a long-established telephone company that is dominant in both the wireless and landline sectors of the Philippine market, with 70 million subscribers and a strategic partnership with the German Rocket Internet AG to provide payment solutions.   PHI earned $3.66 per share in 2013 and analysts’ estimates are for $4.20 per share earnings in 2014, while its dividend payouts have totaled $4.18 in both 2013 and 2014, giving it a dividend yield above 5%.

 With these two holdings you’re investing in two economies with rapid growth, yet very different profiles, one much richer than the other. More important, you’re investing in countries with consistent balance of payments surpluses, which have shown their capability to produce effectively for world markets and won’t run out of money in a downturn. For conservative investors, these types of investments are the most attractive emerging markets plays.