The term “Fragile Five” was coined and first used by the New York-based investment banking company Morgan Stanley analysts in 2013 to refer to developing countries that were largely reliant on foreign investment for economic growth.
Since then, the designation became even more popular, widely-applied to countries other than those in the original list and became a tool for many financial institutions to evaluate the health of more countries. The list changes each year, with some countries added and some excluded.
The First Fragile Five List
The countries on the first list were India, Indonesia, Brazil, Turkey and South Africa. Morgan Stanley employs six main factors while studying the emerging markets: foreign exchange reserves to external debt ratio, US dollar debt, inflation, current account balance, foreign holdings of government bonds and real rate differential.
At a time world economies were recovering from the Great Recession, the concept of fragile economies came into being as investors around the world started once again to withdraw assets from the developing markets back into the US. The sharp move hit Brazil, Turkey, India and Indonesia and South Africa, weakening their currencies and the finance of their account deficit. As a result, those countries suffered, and their economic growths were stalled.
Vulnerabilities Tested Again
The Fragile Five are today facing a new challenge as the global economic growth slows down, the most important reason behind being the trade war between the two titans of the world economy, China and the United States.
However, some countries like Indonesia and India might, in fact, be in the position of benefiting from the disruption of Sino-US trade ties with a potential of becoming alternatives to foreign investment as new safe havens - although that fact simply reiterates their being ‘fragile’ due to dependence on flow of money from elsewhere.
Rising unemployment, loss of trust in the currency and cutting off foreign aid compiled with the rise to power of right-wing populist leaders is once again threatening the fragile five economies, perhaps with the exception of India. The remaining countries, especially Turkey and Indonesia are facing challenges due to political upheavals as their economies remain dependent on their relations with the US and the health of the US economy itself.