Posted February 8, 2015 1:01 am by Comments

James Shinn, the Chairman of Teneo Intelligence, has written a lengthy article for Institutional Investor detailing a new set of so-called Fragile Five emerging markets that could face a foreign exchange crisis. To begin with, Shinn does a survey of global macro traders in London and New York at six-month intervals on what they consider to be the key variables driving financial markets.

Last June, these traders put a 30% probability of a balance of payments crisis by one or more of the so-called Fragile Five – down from 43% in December 2013. South Africa and Turkey were seen as the most vulnerable while Brazil and India were regarded as being largely out of the woods with the jury still out on Indonesia ahead of the July elections there.

In the latest survey though, Shinn says:

Our traders have designated a new Fragile Five, with Argentina, Ukraine and Venezuela joining Brazil and South Africa on the list, replacing India, Indonesia and Turkey. They assess a 52 percent probability of a foreign exchange crisis (defined as a currency devaluation of 20 percent or more within a 30-day period) by one or more of these countries within the first six months of 2015, with Venezuela regarded as the most vulnerable and Brazil as the least.

He also added:

For some emerging markets, the fall in oil prices is providing a neat way to dismantle petroleum subsidies that have been a huge fiscal drag without anyone noticing. India and Indonesia are the most notable examples; Jokowi’s draft budget for 2015 slashes petroleum subsidies by 70 percent. So EM countries that have their houses in order, like India and Indonesia, are enjoying a positive reinforcing effect, whereas countries like Venezuela find themselves in an even tighter bind.

To read the whole article, Global Macro: Big Risks and Opportunities in Emerging Markets, go to the website of Institutional Investor.

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