The C-19 Crisis And The Fragile-5
(6 min read)
The ‘Fragile-5’ – Brazil, India, Indonesia, South Africa and Turkey – first came to attention as a relevant subset of emerging market (EM) economies during the taper tantrum in 2013. They can be thought of as a systemically important group of EM borrowers whose performance is a good bellwether for the asset class as a whole. They account for about ¼ of the world’s population. A key aspect of the Fragile-5 is that both local fundamentals and global conditions drive their economic and financial performance. Externally, they are open to a broad range of influences in terms of geography and sectors.
As a health crisis, COVID-19 (C-19) has affected the Fragile-5 in quite different ways (Chart 1). Indonesia has been part of a group of smaller Asian countries that have been able to limit infection rates, although these rates have begun to edge up more recently. Turkey was able to contain the early bulge in its infection rate. In contrast, Brazil, India and South Africa are experiencing more persistent problems. Weakness in healthcare sectors in all these economies is a problem adding to the economic damage from C-19.
Early in the C-19 recession, the Fragile-5 suffered a major negative asset price shock, in line with the deterioration in risk asset prices everywhere. More recently, these markets have rallied in line with global asset price buoyancy. I think Indonesia is best placed to avoid long-term damage from C-19. There are growing risks to the other four countries, however, especially from rising fiscal deficits (and public debt) and the growing risk of debt monetization. In my view, current asset prices (low or negative real rates) offer very little margin for safety against these risks.
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