Malcolm Scott highlighted in Bloomberg
News back in July this year how “the combined economic output last year of
Brazil, Russia, India, China and South Africa (the BRICS nations) almost
matched the U.S.’s gross domestic product. Where back in 2007, the U.S. economy
was double the BRICS.”
"Despite some disappointments in
some of the BRIC economies, led by China and India, their collective weight in
global GDP continues to rise and therefore also does their importance,"
said Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who
coined the acronym back in 2001, without South Africa.
Yet are the BRICS countries really as
strong as some would like to make out and are Brazil and South Africa leading
the pack in beginning to go backwards after such a great start and such an
opportunity for genuine prosperity for their respective countries?
As of 30th September Standard &
Poor's credit rating for South Africa stands at BBB-; Moody's rating for South
Africa sovereign debt is Baa2; and Fitch's credit rating for South Africa is
BBB. Where for those not in the know a credit rating is used by sovereign
wealth funds, pension funds and other investors to gauge the credit worthiness
of countries like South Africa, thus having a big impact on the country's
borrowing costs.
In an article in the Economist (29th
August 2015) they report how “during the global commodity boom before the 2008
financial crisis South Africa’s mines struggled to expand because of
underinvestment that led to bottle necks at ports and on railways. Some reckon
the country’s coal and iron ore mines could have increased their exports by as
much as 50% had they had the means to get their minerals out to international
markets.”
Now in August 2015 the dire economic
news released for South African showed the economy had shrunk at an annual rate
of 1.3%. The Economist forecasts that “this will be a problem for some time to
come with foreign investors wanting to build power-hungry factories being asked
to come back in a few years. Few will bother.”
Also in South Africa many state owned
firms are racking up huge loses. Petro SA, a national oil company, is about to
post a loss of about 15 billion Rand, ($1.1 billion), the largest ever by a
state owned company in South Africa.
Worse still for this once promising
BRICS country since “the left’s grip on government has grown even tighter. Most
new plans for the economy are now drawn up by two communists, Ebrahim Patel,
the economic development minister, and Rob Davis, a trade minister who doesn’t
think much of trade. Their model is China. An ANC policy document gushes that
the economic ‘leadership of the Communist Party of China….should be the guiding
lodestar of our own struggle.’ Many of the ANC like the idea that the ruling
party should control business directly, and China’s recent troubles probably
won’t change their minds.”
Bloomberg
reported on 10th September 2015 how Brazil’s sovereign rating was cut to junk
by Standard & Poor’s, taking away the investment grade the country enjoyed
for seven years, as President Dilma Rousseff’s struggles to shore up fiscal
accounts amid a faltering economy.
Brazil’s
rating was reduced one step to BB+, with a negative outlook, S&P said in a
statement after markets closed. Brazil’s largest U.S. exchange-traded fund
tumbled 6.6 percent in late trading along with American depositary receipts for
Petrobras, the state-controlled oil company.
The
downgrade, and S&P’s warning that another cut is possible, puts pressure on
Brazil’s economic team led by Finance Minister Joaquim Levy to win passage of
measures that would shore up the country’s fiscal situation by cutting spending
or raising taxes. Rousseff has been unable to find support for her initiatives
amid an investigation into corruption at the state-controlled oil company that
allegedly occurred while she was its chairman, sending her popularity to a
record low and generating calls for her impeachment.
“The
downgrade could be a wakeup call but the political situation is so bad that
it’s difficult to resolve, so it’s a dark path ahead,” Daniel Weeks, the chief
economist at Garde Asset Management, said from Sao Paulo. "Markets will
take this as a negative, and it will probably drag down emerging markets at a
global level.”
Standard & Poor's credit rating for
Russia stands at BB+; Moody's rating for Russia sovereign debt is Ba1; and
Fitch's credit rating for Russia is BBB-.
Neil MacFarquhar mentions how “sanctions
have caused a recession in Russia, and that it is even affecting the spending
habits of the wealthy. Where Barvikha Luxury Village – a neatly groomed
shopping mall housing brands like Prada and Gucci as well as two car dealerships,
Bentley and Ferrari/Maserati – is deserted most days. With the economy reeling
from the oil-price crash and Western economic sanctions over Ukraine, the ruble
has sunk precipitously, inflation is up sharply and real wages are shrinking
for the first time in years, forcing Russians – even the wealthiest – to make
do with less.”
India's sovereign credit profile was
more vulnerable to drought than most of its Baa-rated peers because of the
relatively high share of agriculture in GDP and employment, weak rural
infrastructure, inefficient food distribution and the relative share of food
subsidy cost in the fiscal deficit.
"Although India may avoid drought
this year, its economy remains vulnerable to future drought or fluctuations in
rainfall, and its sovereign credit profile is more exposed to the negative
effect of drought than those of most Baa-rated sovereigns," Moody's said
in a report.
It currently rates India at 'Baa3', the
lowest investment grade -- just a notch above 'junk' status.
"Our positive outlook on India's
rating reflects our view that the measures that central and state governments
are taking to improve rural infrastructure, agricultural productivity and food
distribution, will over time lower overall inflation levels and volatility,
including volatility associated with drought. But in the near to medium term,
policies to improve infrastructure, food distribution, and non-agricultural
employment opportunities hold the key to reducing the annual economic
uncertainty that is linked to the performance of monsoon," it stated.
Standard & Poor's credit rating for
China stands at AA-; Moody's rating for China sovereign debt is Aa3; and Fitch's
credit rating for China is A+.
In an article in Fortune magazine dated
2nd September 2105, they highlight how “analysts are increasingly worried about
the situation in China in part because the global economy has grown
increasingly interconnected. According to the Treasury Department, 30% of the
jobs created in the U.S. since the Great Recession were export-dependent.
Meanwhile, the share of economic growth
coming from emerging markets has increased markedly over the past 20 years.
Back in the late 1990s, emerging markets accounted for 20% of global GDP; now
it’s 40%. And during this decade, China has accounted for a third of global
growth, compared to just 17% for the United States. Given this change, Ruchir
Sharma, head of emerging markets and global macro at Morgan Stanley Investment
Management, has argued that China is now the “critical link” needed to power a
prosperous global economy. There’s no doubt that a slowdown in China will
seriously crimp global growth, given the role the world’s second largest
economy has played in recent years.
Of course, 2015 isn’t 1998. China is a
much bigger force in the global economy today than countries like Thailand or
South Korea, where the trouble in Asia started a generation ago. But while a
slowdown in China might be more meaningful in terms of global growth, there’s
plenty of reason to be skeptical that it will lead to slower growth in the
United States. Exports only account for about 15% of U.S. GDP, while exports to
the Pacific Rim account for just 2% of GDP. With figures like these, even a 10%
decline in trade to the region would shave just 0.2% from growth in the U.S.
The prospects for the U.S. don’t look
spectacular. We’re living in a world of ho-hum 2% growth. But there are no
serious signs of a domestic recession on the horizon. Unemployment continues to
trend downward, and commercial and residential investment look bright.
Investors in equity markets, on the
other hand, may have reason to worry. By many measures, U.S. stock markets are
pricey, and we’ve been due for a correction for months now. But the stock market
follows the beat of a different drummer, with momentum mattering much more, at
least in the short term, than economic fundamentals.
An article by Heather Stewart in the
Guardian dated 29th September states that “rising global interest rates could
prompt a new credit crunch in emerging markets, as businesses that have ridden
the wave of cheap money to load up on debt are pushed into crisis, the
International Monetary Fund has said.
The debts of non-financial firms in
emerging market economies quadrupled, from $4tn (£2.6tn) in 2004 to well over
$18tn in 2014, according to the IMF’s twice-yearly Global Financial Stability
Report. This borrowing binge has taken business debt as a share of economic
output from less than half, in 2004, to almost 75%.”
Probably the only country that has got
it right is China – their growth rate was never going to continue at its past
rate – any economic life-cycle will tell you that. The ‘party’ is probably over
and China will now grow like other mature nations – but out of all the BRICS
countries they have probably had the best response to their economic woes,
regardless of what the press may have you believe.
What the world needs now is both
stability and strong economic leadership – sadly, with politics becoming a celebrity,
power brokered game, rather than a serious business – the future is precarious
at best, and we can only hope that some great, inspirational leadership emerges
soon from the complete mess that exists around the globe at the moment. We
desperately need politicians who will look beyond their own ego’s and actually
do what it says on the ‘tin’ – which is to work for the best sustainable long
term strategy for all their citizens. This will give greater confidence to
business and help the growth of genuine exceptional leadership in the workplace
too.
References:
MacFarquhar, N. (2015). Russians Tighten
Their Belts. Portfolio Magazine, Issue 116, p.84-87.
Matthews, C. (2015). Will The Crisis in
China Sink the US Economy? Fortune Magazine. 2nd September. [on-line: http://fortune.com/2015/09/02/china-crisis-us-economy/]
Scott, M. (2015). Here's the $17
Trillion Reason Why the BRICS Summit This Week Is a Big Deal. Bloomberg News.
7th July [on-line: http://www.bloomberg.com/news/articles/2015-07-06/here-s-the-17-trillion-reason-why-the-brics-summit-this-week-is-a-big-deal]
Stewart, H. (2015). IMF Warns of New Financial
Crisis if Interest Rates Rise. The Guardian. 29th September [on-line: http://www.theguardian.com/business/2015/sep/29/imf-warns-new-financial-crisis-interest-rates-rise]
The Economist (2015). Poorly managed
state owned companies are dragging down the wider economy. August 29th.
P.41-42.
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