Macroscope | Why the ‘fragile five’ emerging market currencies have alarm bells ringing again
Nicholas Spiro says despite strengthening economic fundamentals, Brazil, India, Indonesia, South Africa and Turkey face the risk of capital flight if investor sentiment continues to weaken
At the height of the “taper tantrum” in 2013, when the unexpected decision by the US Federal Reserve to start withdrawing monetary stimulus triggered a fierce sell-off in emerging markets, Morgan Stanley coined the term “fragile five” in reference to a group of developing economies that were suffering sharp outflows of foreign capital.
The five countries in question – Turkey, South Africa, Brazil, India and Indonesia – were all running current account deficits and fared poorly in some other areas of financial vulnerability, resulting in steep declines in their local currencies in the second half of 2013. Yet, as investor sentiment towards emerging markets began to improve in 2016, and several of the countries made concerted efforts to address their weaknesses, markets stopped fretting about the fragile five, with some analysts suggesting the term had outlived its usefulness.
They evidently spoke too soon.
On Wednesday, the rupee, India’s currency, sank to a fresh all-time low versus the US dollar, bringing its losses since the start of this year to more than 12 per cent, the worst performance in Asia. The plunge in the rupee has contributed to the recent increase in India’s inflation rate – driven up in part by this year’s sharp recovery in oil prices – which has forced the country’s central bank to raise its benchmark interest rate twice in the past three months.
Meanwhile, the rupiah, Indonesia’s currency, fell to its weakest level since the 1998 Asian financial crisis on Tuesday, having lost 10.5 per cent against the dollar since the start of this year. Indonesia’s central bank has hiked interest rates four times since May and intervened heavily in a bid to shore up the rupiah.