India and Indonesia can be excused for watching Turkey’s reckoning with trepidation. As Asia’s two representatives among the “Fragile Five" emerging markets, there is every reason to wonder if investors will connect dots.
That would be a mistake given how far New Delhi and Jakarta have come since 2013, when Morgan Stanley assembled a list no government wanted to be on.
Rounding out the five are Brazil and South Africa.
All five nearly crashed amid the Federal Reserve “taper tantrum".
These days, though, only Turkey seems committed to commemorating the five-year anniversary of the list.
And yet, it is a useful reality check for India’s Narendra Modi and Indonesia’s Joko Widodo. Both should be accelerating efforts to strengthen financial sectors and raise economic games.
Brazil is in bad shape, a plight highlighted by massive labour strikes and President Michel Temer’s failure to stabilize the economy.
Foreign investors are fleeing South African bonds, and business confidence is sliding after growth plunged to 2.2% in the first quarter.
Turkey, though, is the weakest link as traders buzz about a full-blown crisis.
If as an investor, you were limited only to the Fragile Five, you’d be rushing into any Indian or Indonesian asset in sight. Yet, much work needs to be done to shield both the economies from the tumult to come both from the developing world and the developed.
Much of the chaos, unfortunately, is coming from the top down. Turkey erred by not acting boldly to modernize the economy since 2013.
But it was Donald Trump’s trade war that knocked Turkey so spectacularly off balance.
Data screens graphing the lira’s 20% free-fall last week dropped jaws around the globe.
And it’s the fallout from US President Donald Trump’s tariffs that should be worrying Prime Minister Modi and President Widodo, who’s known as Jokowi.
One problem: global investors are separating twin-deficit economies—those carrying both budget and current-account imbalances—and the rest.
That puts India, Indonesia and the Philippines at a disadvantage to China, Malaysia, South Korea and Taiwan.
Just as in 2008, when the collapse of Lehman Brothers sent contagion around the globe, India’s more domestic-oriented model is a strength.
Yet, Trump’s tariffs of 25% on steel, 10% on aluminum and a proposed 25% tax on imported cars are disrupting global supply chains.
His levies on Chinese goods—$50 billion on the way to as much as $500 billion—will have chilling effects everywhere. China became India’s biggest trading partner in 2014, the year Modi was elected.
Chaos in the global markets may be the bigger transmission mechanism. The rupee’s 7% drop versus the dollar this year is in the same ballpark as Indonesia’s. The Philippines, too, serving up reminders that dual deficits are terrible things to have when the world’s biggest economy is tossing grenades at markets.
It doesn’t help that the Federal Reserve is hiking interest rates. The Fed has tightened six times since December 2015, and drum-tight labour markets ensure more moves are in the cards. That, in turn, could be true for the Reserve Bank of India (RBI), which on 1 August hiked rates for the second meeting.
Inflation is surely perking up, but some of the motivation at RBI headquarters is to support the rupee. Life would be easier for governor Urjit Patel’s team if Modi’s stayed ahead of risks zooming India’s way.
The bad loans at banks that Modi and RBI pledged to address continue to threaten the outlook. India’s power generation capacities aren’t what Team Modi promised four years ago, and high costs are turning off foreign manufacturers.
So is the slow pace of infrastructure improvements to ensure “Make in India" is more job-generator than political slogan.
Similar critiques are made of Jokowi’s economy, many of which mirror Modi’s. Efforts to open protected sectors, attack graft, improve transparency and increase tax receipts have also won Indonesia a free pass out of the Fragile Five. Imbalances remain, though, as traders are reminding Jakarta just as acerbically as they are New Delhi.
Both economies are moving in the right direction. But Modi and Jokowi must take renewed talk of contagion in emerging market seriously, batten down the hatches and remind investors why they’re still right to bet on India and Indonesia.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.