Brazil, Indonesia, India, Turkey and South Africa. These were the countries dubbed the Fragile Five. Reason being they were at the center of an emerging markets storm last summer. A lot of water has flown under the bridge since then. And besides stock market gyrations and changes in the political landscape, interest rates and oil prices have had important roles to play in changing the dynamics of these economies.
Now, getting to what has changed and where.
Both India and Indonesia were in the list of Fragile Five due to their high current account deficit. Since then, the massive fall in oil prices came in as a windfall gain to India, especially in terms of the benign impact it had on India's import bill. According to IMF, India's current account deficit in the quarter ending June 2014 was 1.6% of GDP. Indonesia's current account deficit was 4.1% of GDP.
Unlike India, current account deficit is Indonesia is affected in two ways by the slump in the oil price. As a country that subsidizes energy consumption, it benefits. As a producer of oil, it is hurt. Besides the oil price decline, the collapse in coal prices globally has also hurt Indonesia. To add to that Indonesian currency has declined along with the rest of Asia.
Amidst these, China which was so far considered one of the strongest emerging markets and had the potential to peg Yuan as an alternative reserve currency, seems to be faltering. As the economy tries to grapple with slowing growth, falling profits and capital outflows, more interest rate cuts should follow but with little real macroeconomic effect. So naturally, the Yuan could continue to weaken against the US dollar. Plus China's total debt stock at the end of December 2014 stood at a massive US$ 905.2 billion.
What to expect?
An article in the Mint argues that given the economy's vulnerability, China should replace India in the list of Fragile Five. Particularly because a sustained rise in US short and long-term interest rates will be problematic for Indonesia, China and India in that order. We think that while China has its set of problems, investors should not assume that oil prices alone can be the remedy to all of India's macro economic problems. And whether China replaces India in the list of Fragile Five or not, foreign investors will look for cues on reforms and earnings growth in India before stepping up investments.