The Fragile Five- High Octane Economies or Ticking Time Bombs

What’s common between Brazil, India, South Africa, Indonesia and Turkey? They are part of an exclusive club called the ‘fragile five’, world economies that are progressing quickly but are noted for being heavily reliant on foreign investments for their growth. In light of the fact that global foreign investment is expected to take a severe hit this year, these progressive economies are likely to be at the receiving end of some harsh treatment. Thus, the title of ‘Fragile Five’ was coined.

The Fragile Five have laid maximum emphasis on foreign investment usually, the fastest way to boost an economy. While these five countries are cited for such an action the other developing countries also rely heavily on this tactic. But, what happens when the stream of foreign investment trickles down? Then, economies are forced to enforce stricter measures to reign in the collapsing conditions. A prime recent example is Turkey- forced to raise domestic interest rates by 4.25% (thereby earning the moniker, the most fragile of the fragile five). This thanks to a currency that is viewed as severely overvalued, as a result of Turkey’s reliance on short-term investments from foreign sources to finance their current account deficits.

However, experts still persist that these countries are the best places to invest in. However, the fragile five and especially Turkey are hitting the average analyst’s scanner. Since May, Turkish foreign investors have sold $3.9 billion worth of lira denominated bonds and are increasingly hostile to the idea of fresh investment in Turkey. However, policymakers in these fragile five countries are taking steps to correct this potential problem, but many investors aren’t entirely convinced. Earlier, the gross GDP and the sizable demographics of these countries were seen as firm reasons for investment. However, that perception has largely been abandoned now. Only time and suitable corrective measures will work as sureties that will bring back trust and long standing investment.