Fragile-five days long gone as funds pile into India, Indonesia

Feb 12, 2024

India and Indonesia Once famously lumped together as part of Morgan Stanley's “Fragile Five”. A decade later, he is an investor favorite.
The outlook for the two Asian giants' bonds and currencies has brightened following successful programs of reforms and fiscal restraint, according to fund managers including Fidelity International, Robeco Group and ABRDN. Even elections in both countries this year are unlikely to spook investors.
The original Fragile Five – which also included Turkey, South Africa and Brazil – refers to countries considered most at risk due to their heavy reliance on foreign investment to drive growth. The improvement in finances – as reflected in credit-default swaps – shows that the market's view of India and Indonesia has moved almost 180 degrees since this term emerged in 2013.
“Both India and Indonesia have strong near- and long-term fundamentals,” said Kitty Yang, strategic asset allocation analyst for multi-asset at Fidelity International in London. “The growth builds on positive (and ongoing) reforms over the past 10 years under Prime Minister Modi and President Jokowi.”
India's five-year credit default swaps – derivatives used to protect bonds against default – have fallen by about 85% from their 2013 peak, reflecting an improvement in the country's credit quality. Same-maturity CDS on Indonesia's debt have fallen 70% over the same period. In contrast, Turkish default swap prices have increased.
Foreign investors pumped a combined $14 billion into Indian and Indonesian bonds last year, while global debt markets sold off on the prospect of higher long-term interest rates. This was the highest combined inflow into the two countries since 2019, and compared to an outflow of $3.9 billion in 2013.
'long overdue'
India's bonds have rallied over the past four months on the prospect of it being included in global indexes, and they rose after the government surprised markets in February by announcing a smaller-than-expected debt sale.
The government also said it planned to reduce its budget deficit to 5.1% of GDP, lower than the 5.3% estimated by economists in a Bloomberg survey.
Kenneth Akintewe, head of Asian sovereign debt at ABRDN Asia in Singapore, said “India is long overdue for a credit rating upgrade” as reforms have improved its fundamentals and resilience, thus boosting equity and fixed income markets. Some great opportunities have arisen.
Prime Minister Narendra Modiwho is standing for re-election in May, mentioned the Fragile Five in a speech to Parliament this month. During the previous government, “the whole world used words like 'delicate five'And policy paralysis for India. And in our 10 years – one of the top 5 economies. That's how the world talks about us today,'' he said.
The expression “Fragile Five” was coined about a decade ago by James Lord of Morgan Stanley, identifying countries with weak economies. Lord is now global head of FX and EM strategy at the bank. A representative for Morgan Stanley declined to comment.
Disciplined Indonesia
Indonesia has also made considerable progress in improving its fiscal position.
After temporarily breaching the regulatory fiscal deficit limit of 3% of GDP in 2020 and 2021 due to Covid-related spending, the government narrowed the deficit to 2.38% in 2022, a year earlier than anticipated. The fiscal gap narrowed to 1.65% in 2023, lower than the revised estimate of 2.28% made in July.
Indonesia has been very disciplined in keeping its fiscal deficit below the 3% threshold, except for a few years during Covid, he said Stephen Chang, a fund manager at Pacific Investment Management Company in Hong Kong. “Even with the new administration, we think some of these economic policies will continue.”
The election to appoint a new Indonesian president on February 14 may have previously been a major risk factor for investors, but is currently considered to be of less concern given the reforms underway.
This is despite the fact that front-runner Prabowo Subianto has campaigned on promises such as free lunches for 83 million beneficiaries, and has said he is comfortable with raising its debt level to 50% of the nation's GDP. .
Markets are also worried about the possible resignation of Finance Minister Sri Mulyani Indravati, who is credited with stabilizing the government's finances.
Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore, said Mr Mulyani has made the finance ministry “a better place in both his tenures, and that helps the fundamental investment thesis for Indonesia.” Still, “it seems unlikely that there will be any apparent deterioration in the overall process of the ministry,” he said.
McNicholas said the outlook for both Indonesia and India remains positive.
“The long-term economic outlook in both economies is favourable. “There are many potential outcomes remaining, which provide scope for further growth potential.”
what to watch

  • India, Poland and the Czech Republic will release inflation data, with any signs of further disinflation likely to boost dovish bets.
  • Philippine central bank to announce rate decision on Thursday
  • Hungary, Poland and Colombia publish GDP data
  • Chinese markets will be closed all week for Lunar New Year, while South Korea, Taiwan, Singapore and Malaysia will all be closed at least through Monday
  • Brazilian markets are also closed for a holiday on Monday and Tuesday, closing again for half a day on Wednesday

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