Pain of the ‘fragile five’ could last for years, warns Axel Weber

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The problems that hit the ‘fragile five’ over the end of 2013 will be in place for a number of years as they were not suitably prepared for such shocks, UBS’s Axel Weber has said.

Speaking at the Fonds ’14 conference in Zurich, Weber, who is chairman of the board at UBS AG and is a former head of the German Bundesbank, said the emerging markets had falsely assumed the ‘good years’ would last forever.

The fragile five – which is made up of India, Indonesia, Brazil, Turkey and South Africa – saw market performance badly hit when the Federal Reserve began tapering and the US dollar strengthened in the final part of last year.

In response to a question on how these countries could recover from such a blow, Weber said the economies were badly set-up to deal with such external shocks.

‘The main mistake they made was thinking that growth was going to go on forever. They mistakenly believed that the good years were it, that would be their situation forevermore, and it quite simply was never going to be.’

‘They became over-exposed to a growth model dependent on consumption and they didn’t save enough to make sure they could overcome a crisis when it occurred.’

‘They are going through a process now, a painful process, which will take an entire business cycle, which could be between three or five years, for it to actually work out and normalise for them.’

Spill-over risks

His views were echoed by fellow panellist, Thomas Jordan, president of the Swiss National Bank, who said it will be hard for the countries to achieve a coordinated response to this shock.

‘They are in a situation where they are no longer synchronised with the developed markets but they are also not synchronised with the global markets when it comes to monetary policy. They are raising rates at the central banks, as expected, but it will be very hard for them coordinate a recovery,’ said Jordan.

‘I am not saying they are ignorant of those factors but they may not be aware of the potential spill-over that short term measures can have both for their neighbouring markets and also for the developed markets.’

Better prospects than most

Meanwhile, the third panellist, Lucas Papademous, former prime minister of Greece and former vice-president of the ECB, was more positive, although still cautious on the short-term performance of the market.

‘The one lesson they should learn is from themselves, I would say. They dealt with a number of these issues in the 1990s and for investors it will be important to look at the fundamentals, which many investors did at that time as well.’

‘They managed to get themselves back into an attractive place and come out of the global financial crisis to become attractive again, so the potential is there. The outlook, as a whole, is positive and I would suggest that these countries have greater, long-term potential than the developed markets.’