Morgan Stanley’s currency research document published last summer, entitled ‘The fragile five’, has become the blueprint for an emerging market sell-off. The fragile five – Brazil, India, Indonesia, South Africa and Turkey – has become the bearish counterpart to the Brics bull of the previous decade.
The common factors to which the research draws attention are high inflation, large current-account deficits, challenging capital flow prospects and potentially weak growth. But these are just outward signs of other predicaments, which are political as well as economic.
It is no coincidence that all five countries seem especially uncertain investments because they all face elections this year: all five (unlike China, for example) are democracies. The report does not mention these political commonalities, but it is surely linked to the numerical signs of economic strife in these countries. When countries have sustained cheap inflows of capital – particularly when elections are at hand – governments are more likely to use it for quick fixes to economic demands: hence the larger current-account deficits.
With less cheap money, the fragile five must deleverage, which will have an adverse impact on growth, particularly as, in recent years, money has gone on current spending (public-sector wages, consumer borrowing and the like) rather than on investments in underlying growth potential.