Fragile-five days long gone as funds pile into India, Indonesia
A decade has transformed India and Indonesia from being part of the notorious “Fragile Five” into investor darlings. The brighter horizon is attributed to successful reform programs and fiscal discipline enacted by these Asian giants, making them appealing to fund managers from prestigious firms such as Fidelity International, Robeco Group, and abrdn. Not even the impending elections within these nations are expected to deter investors this year.
Originally, the term “Fragile Five” coined by Morgan Stanley included Turkey, South Africa, and Brazil, highlighting countries at risk due to their dependency on foreign investments for growth. However, the narrative for India and Indonesia has significantly shifted, thanks to improved fiscal health as indicated by the credit-default swaps, showcasing a nearly complete turnaround in market perception since 2013.
“Both India and Indonesia boast strong fundamentals for the near and long term,” remarked Kitty Yang, a tactical asset allocation analyst at Fidelity International in London. She credits continuous reforms over the past decade under the leadership of Prime Minister Modi and President Jokowi for the growth and resilience of these economies.
Reflecting on their improved credit quality, India’s five-year credit default swaps have plummeted about 85% from their peak in 2013, with Indonesia’s seeing a 70% drop in the same timeframe—in stark contrast to Turkey, where prices of default swaps have climbed.
Last year witnessed a staggering US$14 billion inflow into Indian and Indonesian bonds by overseas investors, marking the highest joint inflow since 2019 and a significant rebound from the US$3.9 billion outflow in 2013, despite the global debt market’s volatility due to the anticipation of persistently high global interest rates.
Indian bonds have seen a rally in the past four months, fueled partly by the potential for global index inclusion. The rally gained further momentum in February following the government’s announcement of lower-than-expected debt sales for the year, alongside plans to reduce the budget deficit to 5.1% of GDP, below the 5.3% predicted by economists.
“India is long overdue for a credit rating upgrade,” asserts Kenneth Akintewe, head of Asian sovereign debt at abrdn Asia in Singapore. He believes that the reforms have strengthened India’s economic fundamentals and resilience, presenting prime opportunities in both equity and fixed income markets.
In his parliamentary speech, Prime Minister Narendra Modi, who is vying for re-election in May, referenced the transformation from being categorized as one of the “Fragile Five” to positioning amongst the top five global economies, showcasing the stark contrast in India’s global standing over the decade.
Similarly, Indonesia has shown commendable progress in fiscal management, narrowing its fiscal deficit to 2.38% in 2022 and further to 1.65% in 2023, surpassing projections and maintaining discipline even in challenging times.
The upcoming presidential election in Indonesia, set for February 14, is now seen as less of a hazard for investors, thanks to deeply rooted reforms. The front-runner, Prabowo Subianto, despite proposing policies that would increase the national debt, has not shaken investor confidence.
Philip McNicholas, an Asia sovereign strategist at Robeco Group in Singapore, believes that Indonesia’s and India’s prospects remain bright. “Both economies have favorable longer-term economic outlooks. There is still a lot of potential for further enhancing growth prospects,” he concludes, showing a positive outlook toward the continued growth and resilience of these once “fragile” economies.
