Of the so-called “fragile five” major emerging markets, Turkey is the most vulnerable to a drop in capital inflows prompted by the anticipated raising of US interest rates this year, according to new research from Fitch Ratings.
However the ratings agency says that the five-member group as a whole, consisting of Brazil, India, Indonesia, Turkey and South Africa, are exhibiting fewer signs of vulnerability across a range of indicators, implying that the most severe effect of the Fed’s tapering programme will be felt by smaller emerging markets.
Turkey was the worst-performing member of the group in Fitch’s most recent heat map of 11 potential vulnerabilities related to external and public finances and the banking sector, released late on Friday.
But Fitch noted that Turkey was the only country with three or more red indicators, hinting that the fears of sudden reversal of capital inflows to emerging markets (EM) after rising interest rates may have been overestimated.
“Perceptions of huge inflows generated by ultra-loose US monetary policy may be misplaced,” Fitch said. “We do not expect a systemic EM crisis. Nevertheless, Fed tightening will exacerbate the macroeconomic and external financing pressures on EMs.”
Morgan Stanley coined the phrase “Fragile Five” in late 2013 to identify what it perceived as the most-at-risk economies to the tapering of quantitative easing by the Federal Reserve.
The bank said this year that both India and Indonesia have enacted sufficient economic reforms to significantly reduce their vulnerabilities to rising US interest rates.
A separate Fitch survey this month found that senior European credit investors see more possibility of contagion from emerging market risks via Brazil than any other country, with Turkey trailing in fourth place behind Russia and China.
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