Newspaper article International New York Times

New Club of Economic Turmoil: Fragile Five ; Investors Sound a Retreat as Boom Times Fade in Developing Countries

Newspaper article International New York Times

New Club of Economic Turmoil: Fragile Five ; Investors Sound a Retreat as Boom Times Fade in Developing Countries

Article excerpt

Brazil, India, Indonesia, South Africa and Turkey make up the Fragile Five, economies too dependent on skittish foreign investment to finance their growth ambitions.

The long-running boom in emerging markets came to be identified, if not propped up, by wide acceptance of the term BRICs, shorthand for the fast-growing countries Brazil, Russia, India and China. Recent turmoil in these and similar markets has produced a rival expression: the Fragile Five.

The new name, as coined last summer by a little-known research analyst at Morgan Stanley, identifies Brazil, India, Indonesia, South Africa and Turkey as economies that have become too dependent on skittish foreign investment to finance their growth ambitions.

The term has caught on in large degree because it highlights the strains that occur when countries place too much emphasis on stoking fast rates of economic growth. The new catchphrase also raises pressing questions, not just about the BRICs but about emerging markets in general.

The Morgan Stanley report came out in August, when there were reports that the Federal Reserve would soon reduce its bond-buying program. The term coined in that report became a quick way for investors to give voice to fears of a broader emerging markets rout, propelled by runs on the Turkish lira, Brazilian real and South African rand.

These fears were realized this week when Turkey, seen by many investors as the most fragile of the Fragile Five, raised its benchmark interest rate 4.25 percentage points on Tuesday.

The sharper-than-expected increase by the Turkish central bank -- which previously took a fairly passive approach to defending its currency -- was intended to persuade foreign investors, as well as corporate and household savers, to hold their lira instead of exchanging them for dollars.

As with other members of the Fragile Five, Turkey relies heavily on fickle short-term investment from foreigners to finance gaping current account deficits, resulting in a currency that many investors say is overvalued.

Investment analysts love to come up with catchy names that simplify their views and, ideally, capture the market spirit of the moment. During the early period of the euro crisis, PIGS, unkindly, came to describe Portugal, Ireland, Greece and Spain. And when the focus turned to Greece and its future in the euro zone, Grexit became the term of art.

The countries in the Asian financial crisis of 1997 never got saddled with a nickname. As in that and other emerging-market blowups, foreign investors and lenders pulled their money out because of broader concerns about political and economic uncertainty.

And while there have been sharp outflows from Turkey and some of the other members of the Fragile Five, broadly speaking, foreign investors have retreated from the asset class as a whole.

None of which surprises Jim O'Neill, who, as an economist at Goldman Sachs in late 2001, came up with the phrase BRICs as a way to highlight the long-term growth potential of large emerging market economies.

"I still believe these are the best investment opportunities in the world," said Mr. O'Neill, who acknowledges being irritated at having to defend his thesis every time there is an emerging market wobble.

Mr. O'Neill, who recently left Goldman and now works independently, has just come up with yet another, similarly dynamic club. He calls this one, comprising populous countries with high growth potential, he calls MINTs, for Mexico, Indonesia, Nigeria and Turkey. …

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