Skip to main content

Why the world is watching the Fragile Five

By John Defterios, CNN
updated 10:01 AM EST, Wed January 29, 2014
Turkey has raised its interest rate -- but investors are asking if this will be enough to stem negative sentiment.
Turkey has raised its interest rate -- but investors are asking if this will be enough to stem negative sentiment.
STORY HIGHLIGHTS
  • Central bankers in vulnerable emerging market economies are taking action
  • Rises seen as an effort to plug severe leaks which threaten to drain reserves
  • Brazil, Indonesia, India, South Africa and Turkey are the focus of investor attention

(CNN) -- After three weeks of punishing losses to its currency the lira, Turkey's central bank has taken what is being viewed as decisive action to reverse negative sentiment. At an emergency meeting Tuesday, the country's main interest rate was raised by 4.25 percent to 12 percent.

"A hike in interest rates was necessary. And it needed to be decisive and credible and it was," explains Marios Maratheftis, Global Head of Macro Research for Standard Chartered Bank. "The decision exceeded market expectations and in my opinion it absolutely had to."

Central bankers in the most vulnerable emerging market economies are being forced into action. The Reserve Bank of India raised the country's key interest rate by a quarter percentage point to 8 percent this week. South Africa's central bank followed suit Wednesday.

Their actions come as the U.S. Federal Reserve's policy making group will decide this week whether to trim another $10 billion in bond purchases as it continues to unwind stimulus support.

The initial response was positive: investors pushed up equity markets and emerging market currencies Wednesday, starting in southeast Asia.

Challenges facing emerging markets
Schaeuble: EU labor markets need reform
Turbulence hits emerging markets

The interest rate hikes by the bigger emerging markets are seen as an effort to plug severe leaks in a monetary dike which threatened to drain reserves that were being used to defend their currencies.

Economist Nouriel Roubini, speaking at the CNN emerging market roundtable at the World Economic Forum in Davos last week, described what we are witnessing as a perfect mini-storm which is being driven by the Federal Reserve, rising inflation, a slowdown in China's manufacturing sector and large current account deficits in a handful of developing countries.

Argentina was the trigger point last week due to high spending and a sudden lifting of currency controls. Now investors have moved on to focus their attention on what Morgan Stanley has called the Fragile Five: Brazil, Indonesia, India, South Africa and Turkey. They share a common economic DNA of large deficits, slowing growth and vulnerable currencies.

South Africa's finance minister Pravin Gordhan told me during a recent interview that the investment bank certainly has not done these economies any favors by marking them out last autumn.

After a decade of blistering growth, emerging markets have had a severe, albeit delayed, fall from grace after the western-led global financial crisis that started in 2008. Brazil is growing at less than a third of its 2010 rate of 7.5 percent, Russia at less than half and the same for Turkey.

As the global sell-off triggered by Argentina unfolded last Friday, Ali Babacan, Turkey's Deputy Prime Minister in charge of economic policy said: "What's happening in Turkey mostly is a repricing process not only just because of the U.S. Fed's tapering but also recent political events have triggered some market volatility."

2014 will be a challenging year on the political front. There are elections in each of the Fragile Five countries, which will just add to uncertainty. As a result, concerns remain that governments will try to resist taking any action that will curtail growth as voters prepare to go to the polls.

Ongoing protests in Ukraine and Thailand have only added to a heightened sense of fragility in the developing world, where the rising middle classes in the developing world do not hesitate to take to the streets in their calls for change or solutions to their problems.

A great deal has changed from the past financial crises in Asia and Latin America during the past two decades. With a couple of glaring exceptions, notably Argentina and Venezuela, most emerging market governments are trying to exercise greater discipline on macro economic policy and limiting their exposure to short term, dollar-denominated debt.

Let's see if market takes that into account as the U.S. central bank continues to change course.

ADVERTISEMENT
Part of complete coverage on
updated 9:02 PM EDT, Mon October 20, 2014
A 15-year-old pregnant girl is rescued from slavery, only to be charged with having sex outside of marriage, shocked rights activists say -- a charge potentially punishable by death.
updated 12:07 PM EDT, Mon October 20, 2014
Airports judged on comfort, conveniences, cleanliness and customer service.
updated 9:19 AM EDT, Mon October 20, 2014
With so many new attractions on the way, the next few years are going to be a roller coaster ride.
updated 12:29 AM EDT, Thu October 16, 2014
Thomas Malthus famously predicted that rising populations would create a food crunch: Could this be true?
updated 5:45 AM EDT, Tue October 21, 2014
The lives of everyone close to Oscar Pistorius and the girl he killed are changed forever, his siblings say.
updated 6:33 AM EDT, Sat October 18, 2014
From "Sick Man of Europe" to the world's fourth largest economy.
updated 9:31 AM EDT, Tue October 21, 2014
Each day, CNN brings you an image capturing a moment to remember, defining the present in our changing world.
updated 7:27 PM EDT, Wed October 15, 2014
Serbia and Albania try to play but the major game is called off after a drone flying a political flag enters the stadium.
updated 7:36 AM EDT, Tue October 14, 2014
George Clooney's new wife, is now Amal Clooney, raising the issue of married names.
updated 1:57 PM EDT, Tue October 14, 2014
The mysterious unmanned X-37B space plane returns to Earth after more than two years in space. But the U.S. Air force isn't saying much.
Browse through images from CNN teams around the world that you don't always see on news reports.
ADVERTISEMENT