Is BRICS Still The Growth Driver Of The World?

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BRICS – Brazil, Russia, India, China and South Africa has been amongst the fastest growing economies since last 15 years. But, recent economic crisis and various internal issues have marred the growth in these emerging nations.

Emerging markets account for more than half of global GDP growth as the BRICS economies didn’t succumb on the growth parameters and have shown double digit progress.But this year the growth regime of BRICS countries is seen a bit jittery due to global downturn that has left world economy in lurch. The high volatility in markets and investor sentiments along with the flat commodity prices has shown the other way.

In terms of net foreign exchange outflows from India’s debt and equity markets, an important concern is the extent to which US growth recovers and the Federal Reserve’s purchases of longer-term Treasuries and mortgage securities start “tapering” down. The UK economy and the eurozone has started to do better and the unemployment rate is decreasing. To sum up, there is little that India can immediately do to reduce oil or gold imports, or to directly address risks arising from the G7 economies that are continuing to recover.Cover Story - BRIC.indd

BRICS countries is moving to BIITS as China and Russia are replaced by Indonesia, Turkey, Mexico, etc. and India has to now also tackle with funds from international banks and institutions. It has been reported that India will invest about $4.5 billion in International Bank for Reconstruction and Development bonds to be able to borrow exactly the same amount from the IBRD, since we have reached the country risk limit for borrowings from that institution. IBRD bonds are issued at yields of about six-month dollar Libor, or London interbank offered rate, minus 20 basis points; and IBRD loans carry interest rates of around six-month dollar Libor plus 80 basis points. If the information that India will invest in IBRD bonds is correct, it is surprising that we are prepared to bear an additional interest cost of one per cent to borrow an equivalent amount from IBRD along with delays related to project clearances. Economic cycles work according to what is hot in one decade and what is not and so the shift in BRICS economies is taking place. But this phase can have drastic effects considering the unprecedented scope of expansion. By 2007-08,more than 100 economies had growth rates of 5% and more which was a global boom and brought these spectacular results.

Emerging economies have a higher growth rate than the developed ones but recently this trend is getting reversed. According to IMF estimates, China is estimated to grow at just 7.8% while India at 5.6% and Brazil at 2.5%.Now,whether the developing countries have this poor performance for a temporary period or it will continue haunting most of the Indian companies is a matter of time.GrowthChart_080613

Many are confident about the sustainable growth in emerging markets as the fundamental forces are strong here. China and India’s demographic dividend unlike most developed countries like US and Japan is still young which enhances the availability of skilled workforce and increased levels of domestic consumption. There was a time when success of Asian countries like Singapore and South korea was seen as an aberration however today’s times have changed and we can see that their combined GDP is more as compared to UK also.

China has heavily invested in infrastructure projects which will serve them good in long term. India too has seen recent reforms in economic policies and new prudent RBI governor along with the entire finance ministry which has led to the radical tax system to get more robust and help to solve most bank’s issues. Specifically for India, it is the individual state performance that matters and proper coordination with the centre will ensure drive the economy. The agricultural output remains robust with a strong pickup in rabi sowing. Trade deficit of India has narrowed and CAD falling to 2.5% in year 2014 from 4.8% last year also boosts investor’s confidence and we can see that foreign exchange reserves have grown since August. For many countries around the world, China has become an important trade partner. Even as China is among the world’s leading recipient of foreign direct investment, Chinese companies make significant overseas investments as they expand into newer markets. With the growing prominence of China in global trade and investment, will the Chinese Renminbi replace the US dollar as the primary reserve currency of the world? The Chinese Government has identified urbanization to play a key part in China’s future development and growth plans. The household registration or ‘Hukou’ practice is a key constraint in policy makers achieving and ensuring holistic percolation of the benefits from increased urbanisation. What are the steps that policy makers must adopt to reform the Hukou system while ensuring that any such steps are financially and socially sustainable?

Even in the context of the impact of the Federal Reserve’s tapering of quantitative easing on all emerging markets , recent economic news from Brazil has been disappointing. It was glad to see good news from Brazil with the Brazilian Institute of Geography and Statistics announcement that unemployment in six of the country’s largest metropolitan areas decreased to an average of 5.4 percent last year, from 5.5 percent in.2012. When viewed in the context of unemployment in the U.S. or the eurozone, this is a very low unemployment rate.

But short-term growth in Brazil is another matter. The country likely finished 2013 with growth around 2.1 percent, the third consecutive year of growth below 3 percent. Inflation in Brazil is also an issue. Inflation likely ran close to 6 percent last year, higher than the government had targeted.

It wasn’t supposed to be this way. At the beginning of last year, Brazil’s government optimistically projected 2013 growth of 4.5 percent, citing an expectation for an overall  improvement in the global economy. It doesn’t look like there will be a turnaround in Brazil’s economy anytime soon. Growth for this year is likely to be around 2 percent, and will be impacted by Brazil’s central bank’s indication that it will raise rates to try to rein in above-targeted inflation.

But I remain bullish on the prospects for emerging markets  compared to those of mature economies over the coming decades. I am definitely optimistic for Brazil’s economic future. It’s easy to forget that Brazil, with a population of slightly under 200 million, is Latin America’s largest economy, and will continue to be the engine of the regions growth. For investors, structural changes in Brazil’s economy are a necessity. The country’s economy needs to change from one dependent on exports and infrastructure spending, to an increased consumer economy.

Many Brazilian small and medium sized enterprises are being challenged by the country’s low growth rate, inflation, and the difficulty in obtaining equity or debt financing from within the country. It’s increasingly clear to many long-term investors that Brazil and many other emerging markets  will outperform most mature economies over the coming decades.  But, it continues to be a challenge to convince management of Brazil’s smaller companies that now there is global equity capital available from global investors with a long-term investment  horizon.

Future outflows from the debt market by foreign institutional investors (FIIs) would be limited since residual foreign investment in government debt stands at about $20 billion. FII equity outflows too should have an upper bound. If there are net equity outflows of, say, $15 billion, this would cause market levels and the rupee to plunge and it would be counterproductive for FIIs to sell more. However, if India’s credit rating is downgraded, as per FII investment norms, they would have to reduce exposure to India. Another source of risk is that the last four years of extremely low interest rates in the larger G7 economies have created several asset bubbles. As US interest rates inevitably rise, bond market bubbles would be among the first to be pricked. Further, although real interest rates are low in India, investment decisions are based on nominal rates.

We did have examples of the Asian crisis in 1990’s which wrecked the economies of South Korea, Malaysia, Indonesia, etc. but since then the perception has changed and the emerging market led global growth in history. Although the economies of India and Brazil have squandered the opportunity by not going in for the second generation of reforms and as a result having to do with lesser growth rates than one may have imagined. Also commodities prices have fallen due to increase in supply and decreased demand from developed economies. The rich countries are not in the mood to import more and more which has led to disastrous performance of BRICS exports. They are instead trying to improve the employment rate ad competitiveness amongst their own resources.

The average dip in growth rates of emerging economies is about 4% which means except China, it is 2.5%.The dominant BRICS economies have bore the brunt of this slowdown the most and with China’s debt burden becoming more than 200% of its GDP. According to IMF data, only 35 out of 185 countries can be termed as “developed” as no other country can sustain the growth for more than a decade. Only 6 countries have managed a growth rate of more than 5% over a period of four decades.

The average income gap of advanced and emerging economies has not changed over half a century and people in emerging economies are bound for a dismal quality of living. The global economy is going through rough and turbulent times and lower sales and investments in emerging markets is a big worry. The recent splurge in innovation and new ideas that are patented in BRICS countries can be washed away if the global economy is under threat. The performance of emerging markets matters a lot to the developed economies and the future impact to the recovery of markets cannot be ruled out.

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Mufaddal Dahodwala

The author is ex-employee of Accenture and he is currently pursuing MMS finance from JBIMS,mumbai. He has won several prizes from top MNCs for his contribution towards articles as well as idea generation and business plans having a social impact to the society.