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Emerging Markets: Another “BRIC” Hits the Wall…
by Martin Hutchinson, Money Morning
Monday, March 9, 2009: Issue #951
Editor’s Note: Recently we’ve been focusing on the economic woes in the United States and our neighbors, but the impact of the current recession is global. It’s affecting the shining “stars” of emerging markets and industrial powerhouses – the “BRIC” nations. This morning, our colleague Martin Hutchinson over at Money Morning has taken a look at the fallout abroad…
Goldman Sachs Group coined the term “BRICs” in 2003 to cover Brazil, Russia, India and China.
This group of four countries was supposed to represent the enormous potential of the emerging markets, and their populations would provide most of the world’s growth in the decades ahead. For a year or two, Goldman’s theory seemed to work and the “BRIC” acronym became immensely fashionable.
But now that the global downturn has hit, the four countries have taken different paths, and it’s no longer clear what traits they still have in common. We actually raised some of these concerns in a two-part series that ran in August – back even before the downturn reached crisis proportions, or analysts began questioning the BRIC concept.
So let’s visit the four countries, taking a look at each one, and see for ourselves whether there’s still any merit to the BRIC concept.
Brazil’s Emerging Market – An Economic Success Story
Brazil’s emerging market is one of the real economic success stories of the last six years. In 2003, it had just elected a socialist president and appeared close to default – its membership in the BRIC group was highly tentative.
But the commodity boom of 2004 to 2008 was highly beneficial to Brazil. The country’s government worked hard to bring down the budget deficit, while its central bank kept interest rates far above the rate of inflation. Consequently, when the commodity bubble burst in mid-2008, the central bank was able to keep domestic demand growing by relaxing its interest rate policy.
Brazil’s economy – as measured by gross domestic product (GDP) – advanced at a 5.3% annual clip in 2008. The forecasting panel of The Economist only expects Brazil to grow at a 1.6% pace this year, but that’s much better than most places. Its inflation rate is 6% – too high, but at least it avoids deflation.
Brazil’s short-term interest rates remain suitably restrictive at 12.5%, and its stock market is down only 4% this year, which is more than investors can say for Wall Street.
Brazil remains a successful development story, albeit at a moderate (and sustainable) growth rate. What’s more, its oil company, Petroleo Brasileiro SA (Petrobras) (ADR: PBR), has found enormous offshore reserves of oil. Production is expected to begin on those oil fields in 2012. It seems likely to make Brazil one of the world’s premier oil exporters.
Whenever someone assembles a list of the world’s great growth economies – no matter what parameters are used – Brazil is virtually certain to be part of it. Unfortunately, some of the other BRIC nations haven’t been faring as well.
Russia’s Emerging Market: A Shooting Star Flames Out
While Brazil has emerged as a success story, Russia’s emerging market showed early promise, but that has given way to a somewhat bleak reality.
Indeed, since that Goldman paper was written in 2003, Russia has been transformed from a successful emerging market into a corrupt kleptocracy without the rule of law and with only oil exports propping it up.
Now that oil prices have dropped, Russia is in trouble. Its consumer prices are rising at a 14% clip on fudged official data, its currency is collapsing – down by a third in the past year – and stock prices are down 80% from their high last spring. Even Russia’s population is declining.
The bottom line: Russia is neither emerging, nor a market.
Unless oil prices recover rapidly, or the country undergoes a sudden conversion to secure property rights, it seems fated to remain impoverished, and to have its economic vigor diverted into military adventurism. It should be on nobody’s list of growth opportunities.
India’s Economic Machine: Political Ineptitude Blunts Growth
India did well from 2004 to 2008, thanks largely to the reforms carried out by the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee from 1998 to 2004. However, the current Indian National Congress-I (Congress) Party-dominated government has made almost no further reforms, and the Indian economic machine is showing clear signs of running down.
While 2009 growth is still expected to be around 5%, estimates of the consolidated budget deficit range as high as 12% of GDP. India is not China: It does not have the huge foreign exchange reserves to finance such a deficit. Thus, the rating agencies are considering downgrading India’s debt to “junk” status.
Given the financing difficulties India is likely to run into, it must be probable that growth will once again be thwarted by lack of foreign exchange, so that India reverts to the traditional “Hindu rate of growth” of 3% to 4% – a growth rate that’s nowhere near enough to lift its rapidly growing population out of poverty.
Another election is to be held in the spring, but it seems unlikely that the BJP will win a government majority (Vajpayee has in any case retired) – in which case the government overspending and opposition to reform of the last five years will continue.
India would then remain an enormously frustrating enigma, a country with huge growth possibilities that is shackled by a corrupt and incompetent government.
China – The Emerging Asian Giant of World Growth
My colleague, Keith Fitz-Gerald, believes China is the main engine of world growth, and that role seems likely to continue – in spite of the current difficulties the emerging Asian giant appears to be facing.
China’s government has pledged an enormous stimulus plan of more than $600 billion, far larger in terms of the Chinese economy than the U.S. counterpart proposed by American President Barack Obama.
However, with roughly $2 trillion in foreign-exchange reserves, huge domestic savings and a budget that is close to being balanced, it seems likely that China can afford its stimulus. By increasing domestic demand the stimulus could pull the country out of recession without causing excessive financing difficulties.
The aforementioned Economist panel expects China to grow at a 6% pace this year, but that number may be conservative. China’s shares are still down 60% from their peak, but they have risen by 20% this year and look attractive at these levels.
Thus, the BRIC group of emerging-growth economies has become merely a capital ‘C,’ with a modest ‘B’ trailing behind. There is some possibility of an ‘I’ rejoining our growth acronym, but there’s apparently no current hope for ‘R.’
In fact, when it comes to the BRICs, there’s only one conclusion to reach: The acronym is broken and has “hit a wall.”
Good investing,
Martin Hutchinson
Editor’s Note: To find out more about The Money Map Report – including a special offer that includes The New York Times bestseller “Crash Proof,” please click here. To read the original article, go here.
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4 Responses to “Emerging Markets: Another “BRIC” Hits the Wall…”
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March 9th, 2009 at 9:23 am
India would then remain an enormously frustrating enigma, a country with huge growth possibilities that is shackled by a corrupt and incompetent government.
How/why do you feel that the government of the USA is much/any different? We in the USA have/had the ability to lead the world in almost every facet, yet we show the world how arrogant/greedy we are by destroying the wealth/future of our own citizens and drag the ENTIRE world into our financial collapse…what has the GOVERNMENT OF THE USA BEEN DOING FOR THE LAST SIX YEARS?
Where has our regulatory/oversight function of the government been? Why do we keep the same policies in effect while ROME IS BURNING? Who is the Senate majority and WHAT THE HELL HAVE THEY BEEN DOING? I want a job where I can do almost nothing and still get paid!
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March 9th, 2009 at 10:27 am
It is really unfortunate that such a well-studied article on the BRIC phenomenon has unnecessarily become biased and pedantic when it came to assessing India. India’s Economic progress is not an exclusive gift from Mr.Vajpayee’s Government. It is the long term harvest of wise investments in its vast Rail Network, its steel Mills which provide the backbone of all infrastructural development, even when commercial temptations were ther to project a so called progressive rate of growth. While it is a fact that Atal Behari Vajpayee’s Government did not rush to foolishly dismantle the progressive steps initiated during Mr.Narasimha Rao’s Government, it is the very same Government which practically froze all March to further Liberalization of Economy and did only cosmetic corrections by selling off some redundant Government hotels and tinkered with the National Carriers.. The Current Congress-led Government was forced to go for Pro Farmer reforms involving huge amounts. The debt burdens of the farmers accumulated during the NDA Government’s tenure and they did precious little to ameliorate the condition. The advocates of Laissez faire cannot understand the political and social costs of allowing a large mass of poor farmers to go hungry and die.
Indian Economy is not of the kind in South East Asia which started to sneeze a decade back when investors from the West caught cold.We shall overcome and be a part of the universal revival, at a faster rate than the U.S.
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March 10th, 2009 at 2:07 am
I disagree with C.S.Radhakrishnan who want to blame Old Govt and try to justify the inefficiency of existing govt who rules for complete 5 years and that too best 5 years from market point of view. Who stopped existing govt from taking liberlisation further and make indian story more attrative. If more outflow is seen from Indian Markets it is all because of sheer incompetence of existing govt to not able to show any positiives of indian economy and efforts from govt side to support them. What happened in the name of SEZ, all land grabbing involving huge corruption.. farmers lost their land with no other business and after couple of months, they got huge debt to be waived off in the name of farmer interest creating huge burden on fiscal deficit. SEZ happened in UPA govt time…..today all sez has become idle land with no investments.. see DLF exiting from projects across india…. Boss…do not be emotional & say that we will revive faster than US…. Accept the reality that we still depend on foreign funds to keep our growth clock ticking…. Our Indian funds are their for swiss bankss and not avialable for India.. Govt does not have will to comeforth for harsh measures to bring that money….
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March 27th, 2009 at 2:18 pm
I agree with Radhakrishnan. Laissez faire economy advocates have an undue obsession with GDP, Growth rates and other numbers and figures.I am glad India still retains some socialist values. I would rather have the govt inefficiently spending its energies on poor farmers than in efficiently bailing out incompetent banks. As a matter of fact, the American administration have lost the high ground in matters of economic competence (or even foreign policy for that matter).
Pankaj, liberalization is not a panacea for all economic problems. In fact, what happened in southeast Asia was triggered by blatant liberalization. If Shourie would have had his way, the global downturn could have been catastrophic for India.
Capitalists have a tendency to want instant results not sustained results and that has caused the global crisis. Indian fundamentals have emerged stronger. In spite of the corruption and inefficiency, the Indian economy is resilient. The problems will take time to mend but as long as we are taking the right decisions, we would surely mend them.
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