Morgan Stanley Names Brazil as the Most Vulnerable Emerging Country

For the American bank, Brazil faces risk due to internal problems, the possibility of interest rate increases in the U.S. and deceleration in China; other banks are also naming Brazil as one of the most fragile, along with Indonesia, Mexico, Turkey and South Africa.

The vulnerability of emerging countries is once again a topic for international investors, and Brazil appears in Morgan Stanley’s analysis as the most fragile of the large emerging countries. Several banks have issued warnings about countries facing internal problems and dependence on foreign currency. The recent jump in the value of the dollar is one sign of this phenomenon. The new group under the market’s spotlight is very similar to the “fragile five economies” of 2013 and includes – in addition to Brazil – South Africa, Indonesia, Mexico and Turkey.

Economists indicate that some of the large developing countries are facing a new, delicate economic period in the midst of a wave of uncertainty and greater vulnerability. The backdrop of the group consists of four main features: the strong dollar and an expected increase in interest rates in the United States, an excessive rise in private sector debt, expected deceleration in China and the lack of domestic structural reforms.

“The period of deflation has diminished and all of the G-3 economies — the United States, Europe and Japan — are showing a turnaround in the direction of growth. As a result, the yield on U.S. debt and the dollar are increasing. This combination may be difficult for emerging economies to deal with,” say analysts Manoj Pradhan and Patryk Drozdzik of Morgan Stanley.

In London, the bank’s economists cite that five countries are in the most vulnerable group: Brazil, Indonesia, Mexico, South Africa and Turkey, in that order. “Our mapping of the fundamentals indicates countries in which international exposure is greater and we call for special attention to Brazil,” they emphasize.

In Paris, the Société Générale bank listed a similar group: Brazil, Mexico, Turkey and South Africa. In the group, the bank indicated the Brazilian real and the Mexican peso as the most vulnerable to an increase in the dollar’s value and interest rates in the U.S. In Zurich, the head of global investment of the UBS, Mark Haefele, disclosed a matching analysis and cited Brazil, Indonesia, South Africa and Turkey as the most vulnerable countries.

Brazil is, at the moment, the country that has suffered the most from this new wave of wariness, and the real is the currency from the vulnerable group that has fallen the most. Just in March, the dollar became 9.35 percent more expensive in relation to Brazilian currency. Among the other economies, the dollar rose 5.9 percent in South Africa, 4.7 percent in Turkey and 4.4 percent in Indonesia. For the year, the increase has reached 17 percent in Brazil and 13 percent in Turkey.

Analysts say that Brazil seems more fragile because, in addition to external factors common to the group, the internal situation is even more complicated. In Stockholm, the bank SEB summarized the context when it stated that “Pandora’s box” had been opened in Brazil. “The tendency for the real to fall will continue in the presence of weak economic growth, the expected higher interest rates in the U.S., tightening of fiscal and monetary policy, the risk of rationing of electricity and a lower rating, corruption and worry about the [Brazilian] government’s ability to consolidate public accounts, in addition to the most severe drought in 80 years,” summarizes the analyst Louise Valentin.

This array of problems is also indicated by Morgan Stanley. “Brazil seems to be the only economy affected by the three aspects of the contagion to emerging markets,” say the economists. The three factors are an increase in interest rates in the U.S., deceleration in China and internal problems.

The list cited by three European banks is quite similar to the view in mid-2013 when Morgan Stanley itself coined the expression “fragile five economies” for Turkey, Brazil, India, South Africa and Indonesia. The one difference currently is India leaving the list and Mexico replacing it.

When the term “fragile five” came about, the Brazilian government reacted with vehemence and rejected the title with a series of data and explanations. When asked for his opinion, the Brazilian minister of finance preferred not to comment.

*Editor’s Note: The quotations in this article, accurately translated, could not be verified.