Trader in Residence And The Fragile Five
Trader in Residence – TiR
The DeGroote Trading Centers will be hosting Trader in Residence, a speaker series being industry professionals in DeGroote to discuss their success in their field of business. The series takes places Tuesdays at 5:30PM in the Ron Joyce Center, RJC, in room 136 and is also viewable via a 2 way camera in the Gould Trading Floor located at 122A in the DeGroote School of Business, DSB.
Drinks and food will be provided at the DSB location.
For further information regarding the series please visit: https://trading.degroote.mcmaster.ca/trader-in-residence/
The list of upcoming speakers is as follows:
Tuesday February 11 – Christine Tekker – Capital Markets leader, educator and entrepreneur
The Fragile Five
By: Kaustubh Raut
Among all emerging market economies, there are five countries are more vulnerable to global economic scenarios. Morgan Stanley defines them as Fragile five. These countries are Brazil, India, Indonesia, South Africa and Turkey.
The rationale behind calling these economies fragile is actually pretty straight forward. These are very much dependant on foreign investment. Morgan Stanley published the report in august 2013 when US government started considering to taper the quantitative easing i.e. monthly bond buying worth $75 billion per month
Another common factor among these countries is all five countries are going to elect their national leader in 2014.
Here is the quick political outlook of fragile five countries
According to Brazilian newspaper Folha de S. Paulo report published on October 2013 and other various polls results published on November 2013, current President Dilma Rousseff is not considered as more favourable to national free market economy.
December 2013, two powerful opponents Marina Silva and Eduardo Campos came together to stand against Rousseff. Markets responded positively. As a result to improve her this image, Rousseff have started taking initiatives to attract private investments in infrastructure projects. So political world is still indecisive about result of elections and post electoral reforms.
It was 2010 when Brazilian economy started showing more volatility. With increasing inflation rate and current deficit, economy and currency became highly susceptible to foreign investments. As a result Brazilian Real has depreciated by about 14.7% against USD from 2010 to 2014. USD reserve have also depleted from $ 379 bil to $ 362 bil within last few months which is an indicator of potential currency crisis.
Even though India has its renowned economist Manamohan Singh in its seat of power for last ten years, it didn’t show the extreme upward surge that everyone was expecting to see. As his weak coalition government continues to face people wrath it is highly possible that coming election won’t be in in favour of coalition government anymore. Political confidence has been shifting to the nationalist party BJP which surprisingly showed really good economic results in the state it was in charge. Especially current PM candidate Narendra Modi who showed astronomical industrial growth in Gujarat state where he still is in power. With almost authoritarian style of leadership Narendra Modi is considered as one of the most powerful candidate for seat of Prime Minister in India.
Indian rupee depreciated by 25% at same time of European crisis. To react to this Reserve Bank of India sold USD in open market, raised the interest rates to counter the depreciation. With decreasing GDP growth rate falling from 10.094 in 2010 to 4.5 % in 2012- 13, foreign investors in India grew very sensitive to international economic events.
President Susilo Bambang Yudhoyono (SBY) will retire this year opening country for new candidate to take power. Most potential candidate Joko “Jokowi” Widodo, Governor of Jakarta, induced sustainable economic growth in troubled city of Java from 2005 to 2012. He also played major role in bringing minorities like Christians and Chinese into city administration. He has yet to declare his candidacy but according to polls he is leading by 27 points ahead of his competitors.
Economically Indonesia looks stronger than other countries since most of the industrial trade is associated with China. Local manufacturing is dependent on Chinese capital and intermediary goods. So Indonesian economy is more dependent on Chinese that global economy and as long as Chinese economy grows strong there is no significant danger to the economy.
African National congress (ANC) has been allied with communist party, unions and other regional parties since apartheid, which has developed high resistance to any significant market reforms. Even though many of the allied parties have been breaking away due to depleting political credibility, none of the party have manage to gain significant momentum to topple the ANC.
Polls suggest that ANC to fall by 10 points from its 2009 results, to 56%, which is still a dominant position in S.A. political scenario. Momentum is gathering behind enigmatic leader Julius Malema and his economic freedom fighters, a political movement. But his agenda of having mines nationalized and expropriate white farms seems far left to private investors. So post electoral reforms are not very optimistic in case of South Africa.
Biggest contributor to GDP in S.A. is mining. With weak metal prices, trade balance has started to break down which is making South African Rand more vulnerable. S.A. central bank has not yet increased the interest rates so there is still room left to keep currency strong by increasing interest rates in future.
Prime Minister Recep Tayyip Erdogan has been occupying seat since 2003 in Turkey. He has been running a kind of authoritarian government by jailing critics, blaming foreign forces for Turkey’s troubles and opposing privatization of major projects. According to current polls, Justice and Development party (AK party), which Erdogan belong to, can hold 42% sets which is good enough to put Erdogan again in power but since he cannot become a prime minister now, he will be considered for position of the President. Current potential prime ministerial candidate Abdullah Gul also belongs to AK party who has similar ideologies as Erdogan. So investors are weary about Turkey’s economic condition. Turkey is consumption driven country with services contribute 61% to national economy. As just like other service focused economies, Turkey is facing problem with current account deficit.
So in combination with its political scenario, turkey economy seems very sensitive to changes in global economy.
So with respect to current economic situation and political activities, Indonesia looks like a stronger candidate among fragile five, South Africa post electoral reforms do not look promising but still has strong control over currency value, political scenario in India and Brazil are still irresolute and economies do not look good with current increasing inflation and decreasing currency value and Turkey is still facing problems with potentially negligible post electoral reforms and widening current deficit.