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New Fragile Five is ‘biggest threat to growth’

Peru, Colombia, Turkey, Venezuela and Argentina have been flagged up as the new fragile five by S&P on the basis of their exposure to rising US interest rates, the Chinese slowdown and the size of their debt mountains.

With growth in much of the developing world slowing sharply even as debt levels soar, a leading ratings agency has identified a new five-strong group of emerging markets most at risk of financial, economic and systemic crisis.

Speaking to Emerging Markets Paul Sheard, chief economist at Standard & Poor’s, highlighted three key risks facing all nations, developed and developing, in the months ahead. Uncertainties over the timing and scale of US interest rate hikes and fears over a slowing Chinese economy were wedded to a third risk: the skyrocketing levels of debt across the emerging world.

He said the three risks, which together “presented the biggest threats to long-term growth for emerging markets”, were most prevalent in five emerging economies: Peru, Colombia, Turkey, Venezuela and Argentina.

“This group of nations is, in my opinion, a new ‘fragile five’ group of nations, in that they are most worryingly exposed to a mixture of those three systemic risks.” S&P in a recent report noted that Latin American sovereigns “are, on average, more vulnerable than sovereigns in Asia” in each of the three risk categories.

Sheard highlighted a potential sixth fragile state: China, the largest emerging-world economy, which is threatened by US interest policy decisions and its own soaring levels of corporate debt, as well as the threat of a sharp economic slowdown at home.

He also pointed to specific fears over Turkey, a bridgehead nation between Europe, the Middle East and Africa, which remains politically gridlocked, its slowing economy encumbered by debt and rising twin deficits. “Turkey has taken on a lot of debt in recent years,” he noted. “They have a big current account deficit and while they aren’t directly linked to a slowdown in China as other sovereign members of [the new fragile five group], they are highly exposed to the Fed’s monetary policy, and to deleveraging risks.”


The ratings agency said that Turkey, Argentina and Venezuela were “particularly vulnerable to a spike in global interest rates, given their weak external position and high domestic financial leverage”. Colombia and Peru, it added, filled out the list of the emerging world’s most fragile economies, each “demonstrating a high vulnerability to China” and its decelerating economy.

In a recent report, the Institute of International Finance pointed to Turkey as being a country “most in jeopardy from emerging-market turbulence” due to its “large current account deficits, questionable macro policy frameworks, large corporate foreign exchange liabilities, and acute political uncertainties”.

On Wednesday, S&P cut its GDP growth forecast on Turkey for 2016 to 2.8%, from a previous projection of 3.2%, warning that external and domestic headwinds were “intensifying”.

Experts pointed to the threat of rising debts across the new quintet of fragile states, most notably Turkey and Venezuela, both of which, noted S&P’s Sheard, were witnessing a “serious domestic build-up of corporate debt”.

Marcus Svedberg, chief economist at emerging market investor East Capital, pointed to Turkey’s tumbling currency, the lira, which has been steadily weakening against the US dollar since late 2010, and worries surrounding rising debts in the world’s seventh-largest emerging economy.

The ratio of foreign exchange reserves to short term debt in Turkey is just 0.8 times, as of September 2015, according to Bank of America Merrill Lynch, against one in Argentina, five in Russia, and 17 in Brazil. “When it comes to corporate indebtedness in the emerging world, Turkey looks particularly exposed,” noted Svedberg.

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