How are the Fragile Five faring?

In 2013, Morgan Stanley coined the term “Fragile Five” in reference to the emerging market economies of Brazil, India, Indonesia, South Africa and Turkey. The rationale was clear: All five were running sizable current account deficits financed by inflows of foreign capital, and FX reserves were generally fairly low, making their economies vulnerable to the changing whims of international investors.

2013 saw exactly that, after the Federal Reserve hinted that it could begin to dial back its asset purchase program established during the depths of the Global Financial Crisis. Markets reacted swiftly to the news, sending U.S. yields spiking and leading to funds being withdrawn en-masse from many emerging markets. The currencies of the Fragile Five tumbled as a result.

Eight years on, with a global pandemic still playing out and a repeat of Federal Reserve tapering on the horizon, we examine how the economies of the Fragile Five are shaping up, and the near-term outlook for their currencies.


External vulnerabilities have lessened somewhat since 2013, with international reserves rising sharply and the current account deficit narrowing notably. Moreover, the Central Bank has been granted formal autonomy from government, which could support investor confidence.

However, overall economic conditions have worsened over the last several years, amid lower commodity prices, an increasingly statist economic policy, and rampant corruption and insecurity. Real GDP contracted 0.8% annually from 2014–2020, while unemployment has spiked and public debt is close to 90% of GDP. As a result, Brazil no longer has investment-grade status from any of the three major rating agencies. While the economy weathered the Covid-19 storm relatively well thanks to hefty doses of stimulus and a relaxed approach to lockdown restrictions, medium-term growth prospects are fairly bleak. Coupled with highly polarized politics and sky-high public debt, this means the currency remains under the threat of changes in international risk sentiment.

Our analysts expect the real to weaken somewhat by the end of next year, ending 2022 at BRL 5.30 per USD. In addition to higher U.S. treasury yields, domestic political uncertainty surrounding the 2022 elections could also play a role. That said, the Central Bank’s aggressive tightening cycle should provide support.


Since 2013, international reserves have risen, while external debt has declined as a share of GDP and the current account balance has improved. In addition, growth was brisk up to 2019, when troubles in the shadow banking sector sparked a slowdown, and it is set to return to a strong trajectory over our forecast horizon, aided by competitive labor costs, supportive demographics and an expanding middle class.

Another factor in India’s favor is robust FDI inflows—which were at record levels last year according to UNCTAD data—as investors are attracted by a huge, largely untapped domestic market and the country’s burgeoning tech sector. This combination of factors makes India less vulnerable to a reduction in Federal Reserve stimulus compared to 2013.

That said, the Consensus is still for a gradual depreciation of the currency going forward, with our analysts expecting the rupiah to end 2022 at INR 74.8 per USD, as the recovering domestic economy sucks in more imports and the current account deficit broadens.


FX reserve buffers have increased in recent years, while the current account shortfall has shrunk considerably since 2013. Moreover, growth momentum has been robust, public debt levels are low compared to many other emerging markets, and the country boasts an investment-grade credit rating from the three major agencies following a series of upgrades over the last decade.

That said, weaknesses remain. The share of government bonds held by non-residents is still comparatively high—albeit far lower than it was a few years ago—making Indonesia vulnerable to capital outflows. In addition, lingering concerns over the future of the Central Bank’s independence could affect investor sentiment. However, our analysts currently see the rupiah holding up well and remaining fairly stable through 2022, ending the year at IDR 14,514 per USD.

South Africa

On one hand, international reserves in terms of months of imports are notably above 2013 levels, meaning the country is better equipped to weather any sudden outflows of money. That said, other metrics are far less encouraging. GDP growth has been meager for years—and even weaker in per capita terms given rapid population growth. Public and external debt levels have soared, while the fiscal deficit was sizable even before the Covid-19 crisis hit.

A range of economic impediments exist, including elevated insecurity, a stark social divide, an intermittent power supply due to troubles at state-owned Eskom and sky-high unemployment. These factors, among others, continue to temper investment sentiment and cause currency volatility, leaving South Africa particularly vulnerable to tighter U.S. monetary policy. Indeed, our analysts see the rand depreciating close to 5% against the USD next year, closing 2022 at ZAR 15.23 per USD.


Vulnerabilities have increased since 2013. International reserves in 2020 were less than half their 2013 level, while external debt has risen sharply. Fiscal metrics—until recently the envy of other emerging markets—have also deteriorated, with the fiscal shortfall broadening substantially in recent years and public debt climbing.

On the political front, relations with the West have soured as Turkey has become more aligned with Russia, while concerns over the direction of fiscal policy have risen as President Erdogan has prioritized a growth-at-all-costs approach, even in the face of intense price pressures. In addition, the independence of the Central Bank has been eroded by Erdogan’s frequent public calls for low interest rates and the high turnover of staff in its upper echelons—the current governor is the fourth in two years for instance. These factors make Turkey acutely at risk from a repeat of the 2013 taper tantrum.

Looking ahead, our analysts see the lira continuing to wilt, as has been the case in recent years, on the back of unorthodox fiscal policy, premature monetary easing, elevated inflation and political tensions with the West. The Consensus is for the currency to end 2022 at TRY 9.71 per USD.

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