From Morgan Stanley:
Every time there is a new threat to the health of global markets, such as fresh buzz about the end of quantitative easing, analysts rush to check the pulse of the “Fragile Five.”
These countries have one important thing in common—high and rising current account deficits that make them more dependent on foreign capital flows. But we have never believed in lumping markets into one faceless group. Though these countries still have five of the hardest-hit EM currencies this year, a more comprehensive look suggests they are on very different paths.
Stocks in South Africa and India have proven relatively invulnerable to currency weakness. And while the current account deficit is starting to correct in India and Brazil, it is stuck in place in Indonesia, and still at more than 5 percent of GDP in Turkey and South Africa—a level that in the past has precipitated currency crises.
The decisive factor this coming year is politics. By sheer coincidence, all five countries elect new national leaders in 2014, with dramatically different implications for reform.
We always look for the rise of new leaders with a pragmatic understanding of economic reform and a mass base to push it through. Right now, only the frontrunner in Indonesia has both, but India looks ready to gamble on an aggressive reformer, while Turkey and Brazil could muddle through under chastened incumbents.
Among the five, the prospects for reform look particularly fragile in South Africa.
Here’s how we see these stories playing out.
South Africa
The prospects are worst in the nation that most needs an overhaul. Nearly a quarter century after toppling apartheid, the African National Congress (ANC) is still in power with the same allies, the unions and the communist party, forming an entrenched elite hostile to any significant market reforms.
This paralysis is most likely to change under breakaway factions of the ANC, because South African parties need roots in the liberation struggle to have political credibility. Lately, more factions are breaking away, but they have neither the momentum to win in 2014 nor the will for pro-growth reform.
The ANC vote is expected to fall about ten points from its 2009 total, to 56 percent, but hopes for internal party reform have been undermined by the near invisibility in recent months of the leading ANC moderate, Cyril Ramaphosa. The main challenger remains the Democratic Alliance, a center-right party that pushes practical improvement in public services but (despite efforts to recruit young black leaders) is still seen as too white to win a majority. The other moderate reform party, Agang, was launched in February by a former apartheid activist, Mamphela Ramphele, but she lacks star power and her party polls in single digits.
So do the ANC breakaway parties. In 2008, party rebels formed COPE, but they have been paralyzed by infighting ever since. The momentum is gathering behind charismatic firebrand Julius Malema and his new “movement,” the Economic Freedom Fighters, a jab at the failure of ANC freedom fighters to deliver economic results. But Malema wants to nationalize mines and expropriate white farms, so his challenge from the far left could make the ANC even less likely to push market reform.
