The Determinants of Economic Fragility: Case of the Fragile Five Countries

This paper makes an empirical investigation of the determinants of fragility in terms of long-term fiscal sustainability and sovereign ratings for Brazil, India, Indonesia, South Africa and Turkey, referred to as the “fragile five” by Morgan Stanley (2013), using the Fully Modified Ordinary Least Square (FMOLS) approach developed by Phillips and Hansen (1990). The dataset covers the 1980–2012 period for fiscal sustainability and 1990–2012 for sovereign ratings in these countries. The study revealed a statistically significant relationship between fiscal sustainability and current account balance, gross domestic product (GDP), total reserves, energy imports, exchange rate, external debt and credit to the private sector, while the findings associated with sovereign ratings demonstrate significantly that the leading determinants of sovereign ratings are exchange rates, total reserves, energy imports, foreign direct investment (FDI) net inflows, current account balance, GDP and external debt stocks.