What Are the Fragile Five?

Five Emerging Markets Overly Dependent on Foreign Investment

Flower market in Bangalore, India
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"Fragile Five" is a term coined by a financial analyst at Morgan Stanley in 2013 to represent emerging market economies that are too dependent on unreliable foreign investment to finance their growth ambitions.

The original member were countries were Brazil, India, Indonesia, South Africa, and Turkey. Sometimes the list changes. In December 2016, Morgan Stanley said these five countries are now Colombia, Indonesia, Mexico, South Africa, and Turkey. Morgan Stanley scores emerging markets on these six factors: current account balance, FX reserves to external debt ratio, foreign holdings of government bonds, U.S. dollar debt, inflation, and real rate differential.

In November 2017, credit ratings agency S&P Global, named its "Fragile Five" as Turkey, Argentina, Pakistan, Egypt, and Qatar, according to how negatively they were affected by rising interest rates.

However, due to weakening investor sentiment as of September 2018, the original "Fragile Five" are again at risk of capital flight.

How and Why the Fragile Five Were Formed

These countries were named as such in response to the global economic recovery between 2011 and 2014. In 2013, the U.S. Federal Reserve began withdrawing money stimulus. The developed markets, like the U.S., were recovering, so investors were moving money back into the U.S. dollar. That resulted in emerging markets investments getting sold off. These sharp outflows came mainly from Brazil, India, Indonesia, South Africa, and Turkey. Their currencies, the Brazilian real, the Indian rupee, the Indonesian rupiah, the South African rand, and the Turkish lira, experienced significant weakness and made it difficult to finance their account deficits.

The lack of new investment also made it impossible to finance many growth projects, which contributed to a slowdown in their respective economies, making them vulnerable.

What happened previously, just five years earlier when these markets experienced a boon, began to unravel. After many developed economies contracted in 2008, emerging market economies attracted a large amount of investment capital due to their relatively strong growth rates. This capital was employed in various parts of the economy to enhance growth rates. For example, new infrastructure projects were taken on that employed a number of citizens and companies in the region. But, the sell-offs in 2013 proved to be damaging.

In 2015, most of these markets experienced ongoing declines. They continued to rely on foreign investment to replenish their current account deficits. India, however, experienced a more stable currency, falling inflation, and controlled fiscal deficit, making it a much better investment destination. The remaining four countries were the worst performers between August of 2013 and August of 2015. Notably, India went off of the list altogether for a time - back in 2017. India's stocks and currencies outperformed the largest economies for at least half of that year.

Renewed Economic Worries

In 2018, the currencies of each of these countries fell sharply against the U.S. dollar, which is poised for a continued rally. This has caused alarm bells ringing for emerging markets and spells trouble for the "Fragile Five," because back in 2013 when they were singled out, they were under the most pressure against the U.S. dollar. It looks like they will remain in this "Fragile Five" category for some time to come.