April 2015 Issue
The BRICS were supposed to redraw the map of global business, and for a short while they did. Following their christening in 2001, the countries which made up the bloc – Brazil, Russia, India and China, and latterly South Africa – all quickly became economic heavyweights.
Though predictions about the bloc’s potential economic power have varied considerably, the BRICS were almost universally heralded as the future for global finance, and perfect profit generating vehicles for investors’ cash. As the established, developed economies of North America and Europe were supposedly on the wane, a new class of economic superpowers was expected to emerge. For a while, the BRICS lived up to their billing, registering double-digit GDP growth and providing considerable returns for early investors.
But in recent years, the BRICS have begun to lose some of their lustre. It is certainly difficult for countries to maintain such extreme and relentless growth over a decade or more. Equally, shifts in the global economy have had an impact on the bloc’s recent performance. Regardless, early adopters to the BRIC markets made hay while the sun was shining; by comparison, latecomers have found the going a little harder. Returns in the emerging markets have been declining for some time. Between 2011 and 2014 the benchmark MSCI BRIC Index has lost an average of 9.6 percent per year.
While returns and investor confidence in the BRICS have trended downwards in recent years, it is important to note the disparity between these nations. Though they have been grouped together by predominantly Western commentators, these countries are at different stages of their economic development. Each has its own distinct economic risks, political structures and demographic groupings. While the Chinese population has an ageing and increasingly shrinking working population, Brazil’s is growing unabated. In Brazil and India, more of the countries’ youth are entering the workforce, which will hold their economies in good stead going forward.
These issues notwithstanding, there are numerous concerns for the BRICS to overcome. Clearly, Russia is in the midst of a genuine economic and geopolitical crisis. Brazil has suffered from endemic declining growth patterns for a number of years now. And China is coming to terms with an increasingly stagnated economic forecast for the first time in decades.
Furthermore, the rise of other economic blocs – such as the MINT nations (Mexico, Indonesia, Nigeria and Turkey) or the CIVET nations (Colombia, Indonesia, Vietnam, Egypt and Turkey) – and the resurgence of developed economies have called into question the BRICS’ potential as world economic leaders. “Investors began to diversify away from the BRICS some years ago, towards the CIVET or MINT groupings, and frontier markets have attracted interest for the first time,” says Charles Robertson, an emerging markets specialist and global chief economist at Renaissance Capital. “There was less than $5bn of equity invested in MSCI frontier countries a decade ago; now, this has risen to over $25bn. Countries like Nigeria, Pakistan and Vietnam offer a combination of improving demographics and education, low wages and a rising middle class that have already attracted interest. Much of Africa is benefiting from these trends.”
IC not BRIC
The effects of the global credit crisis and recession of the late 2000s are still being felt in many countries today, from Southern Europe to Russia and Brazil. For countries which in 2007 recorded GDP growth of 8.5 percent (Russia) and more than 6 percent (Brazil), the manner in which their expansion stalled has been startling. In the fourth quarter of 2014, the Russian economy contracted by 1.8 percent while Brazil’s economy declined by a little over 1 percent. The gravity of the situation has led to calls for the removal of the countries from the BRIC grouping. Jim O’Neil, the originator of the BRIC acronym, has spoken about differentiating Brazil and Russia from the remainder of the bloc, though it would be somewhat presumptuous to cut the two loose at the moment. “Three years, which is how long Brazil has disappointed, is not really the basis for making such a conclusion. If Brazil and Russia carry on in the same way, of course they won’t warrant being regarded as a BRIC [by 2020],” he said.
“Much rhetoric surrounds the possible break-up of the BRICS, but reports of their demise may be greatly exaggerated.”
Obviously, if Russia and Brazil are to recover the magic of the 2000s and maintain their places at the BRICS table, there is much work to be done. Unlike Brazil and Russia, China has gone to great lengths to embrace economic change. India, following the election of prime minister Narendra Modi, has benefited from historically low oil prices as well as its emerging, dynamic young workforce.
With both India and China outpacing Russia and Brazil, the BRICS paradigm is shifting. Chinese president Xi Jinping has allowed private investors to take stakes in state-owned firms and initiated a stock trading link with Hong Kong. Meanwhile, Mr Modi has cut fuel subsidies, relaxed restrictions on foreign investment in Indian businesses and promised to narrow the budget deficit.
The outlook for the BRICS nations appears more divided than ever. Some commentators have suggested we could see a two-tier split, although others are sceptical. “A two-tier BRICS is out of question, as economic growth and investment attractiveness aren’t the only ingredients that tie the five members together,” says Renato Flôres Jr, a professor at the Graduate School of Economics in Rio de Janeiro. “As for India and China, there is much hype about each of them – in the wrong direction. China will not sink slowly and India will not become the new champion of the league. The former has myriad problems to cope with – including, much like its four other colleagues, poverty alleviation and the middle income trap – but has been tackling all of them.”
For Marcos Troyjo, co-founder and co-director of BRICLab at Columbia University, the ability and political will demonstrated by the Indian and Chinese governments has gone a long way to protect their economic future. “Both Russia and Brazil took comfort in the high demand the world presented vis-à-vis their commodities, and therefore did not embark on any kind of reform,” he says. “And here, what would have to change touches the very core of Brazil and Russia’s political economy institutions. That is why prospects remain bright for China and India whereas Brazil and Russia are underperforming. But I don’t see a two-tier split on the way, especially when it comes to what I call ‘BRICS 2.0’ – the institution-building process that has the New Development Bank (NDB) at its core. I don’t think the institutional dynamics toward an ever-stronger BRICS group will be paralysed by the heterogeneity that characterises each member-country.
“BRICS nations are indeed very different,” he continues. “Russia and China are permanent members of the UN Security Council. Russia, India and China are nuclear powers. India and Brazil are huge representative democracies. Russia and Brazil are major producers of commodities. China’s economy is 25 times bigger than South Africa’s. International experience shows, however, that the absence of a comprehensive commonality of interests is not an insurmountable obstacle to cooperation projects. For BRICS, the essential point is that the areas in which their interests coincide – such as development financing, improving global economic governance and building a more equitable world order – should coexist pragmatically with their differences in economic clout, political agenda and worldview. If that be the case, then ‘BRICS 2.0’ will definitely take off,” he adds.
The NDB, though unlikely to have a major impact on the economic condition of the BRICS themselves, will probably play a significant role in shaping their place in the global economy. The bank, launched in July 2014, is a key development for the BRIC countries as well as other emerging markets. The NDB is set to further establish the BRICS as the dominant voice in the emerging markets, as well as the collective South, which is becoming a pivotal point of trade for the BRIC nations. South-South trade, according to data from the World Bank, now exceeds North-South trade by around $2.2 trillion annually. The bank will also establish a reserve fund to finance much-needed infrastructure projects and to head off future economic crises.
Though individually the BRICS are a disparate, economically varied group, on a collective level their financial strength has never been stronger. With the NDB, the BRICS will likely increase their standing on the international stage, and will hope to challenge the hegemony of the Bretton-Woods institutions in the coming years. Eventually, the NDB may even seek to break stranglehold of the World Bank-IMF over issues such as funding for basic services, emergency assistance, policy lending, and providing funds to conflict-affected states in the developing and developed worlds. “The NDB will no doubt constitute an important source of funds, ideas and best-practices across the BRICS – and other countries – in vital areas such as infrastructure, education and R&D,” says Mr Troyjo. “I also think the bank will become a stepping stone to other consensus-based initiatives by the BRICS, much like the UN, the IMF, the World Bank and the WTO. We must acknowledge, however, that if growth were indeed to stall in any of the BRICS or in the group as a whole for an extended period of time, that would risk putting its nascent institutions to rest – and the NDB would be the first of those to lose its meaning. Those structural, modernising reforms that both Russia and Brazil must enact are 100 times more important for their economic future than the resources that can be offered by the NDB.”
Structural reform has been a hot topic in Brazil and other emerging markets for some time now. In February, the Organisation for Economic Cooperation and Development (OECD) urged countries to implement a broad program of structural reforms to restore healthy economic growth in light of another global economic slowdown. Brazil has enacted some structural reforms in recent years, such as infrastructure concession sales. But further reform is needed. Widespread corruption in the country’s state oil company, Petrobras, has helped to illuminate a number of structural flaws within Latin America’s largest economy. The Petrobras scandal, which has seen a number of the company’s directors accused of taking bribes from construction companies and funnelling funds to parties of the ruling coalition, could have a disastrous effect on the current Brazilian government. Though the scandal does not directly involve the government, some commentators have called for the impeachment of president Dilma Rousseff. According to the Brazilian federal police, the group under investigation is believed to have moved more than $3.9bn in “atypical” financial transactions. Bribery and corruption may well be institutionalised in the fabric of Brazilian politics and economics, and more must be done to counter the problem domestically – a move which could help to reinvigorate the national economy.
Recovery
Since the BRICS began their meteoric rise, the global economy has fluctuated wildly. Their weakening position has been symptomatic of the wider global economy, which is still coming to terms with the repercussions of the financial crisis. As the world continued to shift to accommodate the changing economic landscape, many countries, both emerging and developed, have had to undergo a profound adjustment.
Much rhetoric surrounds the possible break-up of the BRICS, but reports of their demise may be greatly exaggerated. With some structural reforms underway and the economic sands shifting, could a BRICS resurgence be on the cards? “Ups and downs are a constant in economics, and the endowments and regional leading position of the five countries will eventually help them to recover,” says Mr Flôres. “Bottlenecks differ from member to member, and it is hard to conceive the kind of growth rates previously seen in China, and more recently in India, being restored in full. All BRICS members need more innovation and higher productivity. China is the best positioned of the five in this respect. The continued supremacy of the US – especially in terms of innovation – along with potential unexpected developments elsewhere, mean it will not be easy to forecast how these five countries will rank in 10 years’ time.”
A repeat of the record levels of growth recorded by the BRICS in the late 2000s looks unlikely, particularly given the current nature of the global economy. But all is not lost. “In the absence of tough economic reforms, and with commodity prices down, explosive growth rates are probably a thing of the past for Brazil and Russia,” says Mr Robertson. “A domestic credit boom could push up growth again in Russia, but would also increase debt levels and would not be sustainable over a 5-10 year horizon.”
There will be no easy renaissance for the BRICS. The NDB may help to rebalance the global financial system as a counterweight to the IMF, but it will not be a cure-all remedy for the BRICS. The BRICS, along with other emerging nations, have closed the gap between themselves and the more prosperous West over the last 15 years, and begun to adapt to economic change. But the BRICS won’t be content to merely survive in the international marketplace; ambition could see them strive to become the foundation on which the future global economy is built.
© Financier Worldwide
BY
Richard Summerfield