What Are the Fragile Five?
Emerging Markets Overly Dependent on Foreign Investment
The "Fragile Five" is a term coined by a Morgan Stanley financial analyst in 2013 to represent emerging market economies that are too dependent on unreliable foreign investment to finance their growth ambitions. Since then, other financial firms such as ratings agency S&P Global have issued different rankings, while the World Economic Forum compiles a list of its own based on criteria that involve world peace.
The Fragile Five Are a Moving Target
The original Morgan Stanley countries in 2013 were Brazil, India, Indonesia, South Africa, and Turkey. In an updated list issued in December 2016, Morgan Stanley named Colombia, Indonesia, Mexico, South Africa, and Turkey. Morgan Stanley scores emerging markets on 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 rating agency S&P Global picked as its "Fragile Five" a different set of nations—Turkey, Argentina, Pakistan, Egypt, and Qatar—because of how negatively these countries were affected by rising interest rates.
In its analysis of developed and emerging markets, the World Economic Forum (WEF) in 2019 reports the Fund for Peace ranked Venezuela and Brazil as the countries most in decline because of political corruption and reduced services.
Impact of U.S. Tariffs on Fragile Five
As U.S. trade and tariff policies that began in 2018 continue to escalate in 2019, the "Fragile Five" may change again. The tariffs put some of the countries on Morgan Stanley's original list into a better position, particularly Indonesia.
While India was already improving as an economic power because of political changes and is unlikely to return to "Fragile Five" status, Indonesia is now in a position to join in the status of safe haven for investors during the trade war escalation, according to some analysts.
How and Why the Fragile Five Were Formed
Morgan Stanley selected its first "fragile five" in 2013 in response to the global economic recovery. As developed markets like the U.S. were recovering from the 2008 financial crisis, investors began moving money out of the emerging markets and back into the U.S. dollar. 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 and added vulnerability in their respective economies.
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 and it dropped off the list in 2017. India's stocks and currencies outperformed the largest economies for at least half of that year.
The future of the "Fragile Five" rests heavily on the stability of the U.S. economy. Should the dollar weaken, their fortunes could improve.