What Are the Fragile Five?

Five Emerging Markets Overly Dependent on Foreign Investment

Flower market in Bangalore, India
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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, others such as ratings agency S&P Global have come out with their own listings.

Sometimes the nations change. The original member countries in 2013 were Brazil, India, Indonesia, South Africa, and Turkey. In its 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 Turkey, Argentina, Pakistan, Egypt, and Qatar, according to how negatively they were affected by rising interest rates.

As U.S. trade and tariff policies that began in 2018 continue to escalate in 2019, the "Fragile Five" may not be as fragile. The tariffs are putting some of Morgan Stanley's original list into a better position.

While India was already improving because of political changes, Indonesia is now in a position to enjoy the status of safe haven during the trade war escalation, according to some analysts.

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 monetary 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 and added vulnerability in their respective economies.

Just five years earlier, these markets experienced a boom, but that 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 selloffs 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 2013 and August 2015. Notably, India dropped off 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 continues to rally well into 2019. This has caused alarm bells 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. They stand to remain in this Fragile Five for some time to come.