Sunday, October 4, 2015

What’s Happened to the BRICS Countries?

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.
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:]
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:]
Stewart, H. (2015). IMF Warns of New Financial Crisis if Interest Rates Rise. The Guardian. 29th September [on-line:]
The Economist (2015). Poorly managed state owned companies are dragging down the wider economy. August 29th. P.41-42.