Down but are BRICs out?

What happened to the so-called BRIC nations of Brazil, Russia, India and China that once offered such great economic promise?

When he worked as chief economist at investment bank Goldman Sachs just after the turn of the century, Lord O’Neill of Gatley, now Commercial Secretary to the Treasury, coined an acronym which became a worldwide phenomenon.

He wrote at the time that over the next ten years, the weight of the BRIC countries – Brazil, Russia, India and China – in world gross domestic product would grow, “raising important issues about the global economic impact of fiscal and monetary policy in the BRICs”.

As a result, he called for world policymaking forums to be reorganised and in particular to include these fast-growing nations, beginning with the G7 incorporating BRIC representatives. South Africa was later added to the fold and BRIC became BRICS.

All four of these countries have suffered serious slowdowns in growth and China, for many years the star performer out of the BRIC nations, may face more rough times ahead

Growth accelerates

He was correct and the world witnessed years of rapid growth in these countries, especially in China which has become the world’s second-largest economy and is poised to overtake the United States.

The focus has also switched from the G7 to the G20, which includes all four of the original BRIC nations and has grown in importance since it was founded in 1999.

However, in the past year all four of these countries have suffered serious slowdowns in growth and China, for many years the star performer out of the BRIC nations, may face more rough times ahead in the coming months.

Here, we look at what went wrong in each of these countries and ponder what the future might hold.

Brazil

brazil_gdp_growthBrazil’s economy, currently the seventh largest in the world, is in pretty bad shape. Inflation is at a 12-year high of almost 10 per cent, corporate profitability has slumped and consumers’ purchasing power has tumbled.

As a result, Moody’s, one of the big three credit rating agencies, is expecting a sharper recession than previously forecast this year of -2 per cent. This is worse than the 1.5 per cent drop the International Monetary Fund pencilled in its latest World Economic Outlook.

Shweta Singh, an analyst at Lombard Street Research, says: “It typifies almost everything that can go wrong in an emerging market. It is one of the most exposed economies to the collapse in global metals prices triggered by China’s slowdown. It has lost more competitiveness than most emerging markets. It is also highly exposed to a strong US dollar.”

However, if this wasn’t bad enough, the situation now looks likely to deteriorate further. At the time of writing, speculation was mounting that Brazil’s President Dilma Rousseff could be impeached amid claims of fraud and corruption.

As well as a rapidly shrinking economy, Brazilians are also angry about the Petrobas scandal, under which several politicians and business leaders have been dragged into an investigation into corruption at the state-owned oil giant.

Ms Singh argues that if this materialises, “political uncertainty will weigh heavily on an already battered economy” and warns this development “is a severe deterioration in the political backdrop, which threatens the adjustments the economy badly needs to stage a recovery”.

Russia

russia_gdp_growthRussia’s ongoing conflict with Ukraine and the consequent barrage of sanctions imposed by the West, combined with tumbling oil prices, has resulted in a deep recession, which shows no signs of easing.

The most recent figures showed the economy contracted by 4.6 per cent in the second quarter of the year on an annualised basis, compared with a 2.2 per cent drop in the previous three months.

On top of this, the ruble has fallen by 20 per cent against the dollar since the beginning of the third quarter of the year and inflation is hovering around the eye-watering 15 per cent mark.

In a desperate attempt to prevent a further economic slump, the Bank of Russia cut interest rates at the end of last month by 0.5 per cent to 11 per cent. While this was the fifth cut so far this year, the central bank has slowed the pace of reduction due to the weakening currency.

Liza Ermolenko, emerging markets economist at Capital Economics, says: “The latest plunge in global oil prices and the associated depreciation of the ruble have added to what was already a bleak picture for the Russian economy, and reinforce our view that this year’s recession will be deeper than most expect.”

India

india_gdp_growthWhile India has its problems, including dire exports and poor bank lending figures, it is fair to say that it is performing the best out of the four original BRIC nations.

Before China’s economy plunged into turmoil, Lord O’Neill even joked to Bloomberg News at the beginning of the year that BRIC may become IC as both Brazil and Russia continue to struggle to return to growth.

Now, however, one could forecast that BRIC could become I as India increasingly looks like the last man standing, with its growth set to overtake that of China this year.

That is not to say that India doesn’t have problems. In US-dollar terms, Indian exports fell by almost 20 per cent in the 12 months to June, marking the seventh consecutive month of contraction, while Narendra Modi, the new prime minister, has been slow to push through the reforms he promised.

“Of the major emerging economies, India is one of the least dependent on global trade and capital flows.  Therefore, it should be less vulnerable to a slowdown in China and a rise in US rates than many other countries,” says Julian Mayo, co-chief information officer of Charlemagne Capital.

“India’s growth model is evolving into a more balanced one, with manufacturing set to take a larger share of the economy. If the Modi reforms continue and deepen, productivity should increase markedly and India should grow at a much faster rate than China in the next decade, as it plays catch-up with its northern neighbour.”

China

china_gdp_growthAfter growing at an average of 10 per cent a year for three decades, China has hit a great wall. Annual growth in China, according to officials, has slowed to 7 per cent, although Capital Economics, an economic consultancy, believes it is more likely to be between 5 and 6 per cent.

Part of the problem has been that by tracking the strong dollar, the renminbi has appreciated significantly against other currencies. That has hit exports which slumped 8 per cent in the year to July, leading the government to decide the country needs greater export demand.

As a result, in the second week of August, Chinese policymakers unexpectedly devalued the renminbi. Another reason for doing so could be that it wants China’s yuan – a primary unit of account – to be part of the International Monetary Fund’s special drawing rights, a kind of global supra-currency. This would give it more financial and political power.

The move sent global markets into a tailspin, only to be outdone by so-called “Black Monday” later in August, when more than $1 trillion was wiped from the value of companies around the world over renewed fears of China’s difficulties. Any further developments are likely to cause similar reactions as investors’ nervousness over the state of the Chinese economy increases.

David Riley, head of credit strategy at BlueBay Asset Management, says: “As the world’s second-biggest economy and largest trading nation, small changes in China can have big implications, and it will remain a key source of global macro uncertainty and market volatility.”

BRIDGING THE GULF

As the original BRIC nations face turbulent times, business will no doubt be looking at other growth opportunities around the world.

One region that a number of British businesses are increasingly considering is the Gulf. While the region has had its problems, notably Dubai’s financial crisis in 2009, and there are concerns over human rights, there are opportunities for businesses.

uae_gdp_projections

The latest available figures from the Office for National Statistics showed the UAE is number 12 in the UK’s top 50 export markets, while Saudi Arabia is in 18th place, Qatar is 31st and Kuwait is 48th. There is scope for all these countries to rise further up the list.

Although Dubai and Abu Dhabi have been talked about for years, oil-rich Saudi Arabia is also firmly on the map, with half of the population under the age of 25 and a growing private sector. What’s more, more than 20,000 Britons already live and work there.

The largest economy in the Arab world, UK Trade & Investment says its benefits include growing diversification within the Saudi economy, massive government investment in transport, infrastructure, healthcare, education and energy, and a common use of English in business.

Opportunities and challenges

However, there are challenges, which include identifying suitable sponsors for initial entry into the market and finding an appropriate Saudi partner for joint ventures.

It also stressed that a physical presence is very important when establishing a business in Saudi Arabia. Businesses must also employ a certain quota of Saudis to comply with Saudisation rules.

“Doing business in the Gulf remains challenging, but there is also great opportunity. Saudi is the largest market by some margin, so the Kingdom is a great place to start,” says Adam Hosier, founder director of AEI Saudi, a Riyadh-based consultancy.

“But wherever you focus, it is important to seek sound, independent advice from people on the ground with the experience and knowledge to ensure your strategy is as low risk and low cost as possible. The key to success in the Gulf – commit don’t commute.”

Peter Bishop, deputy chief executive of the London Chamber of Commerce and Industry, adds: “In the Gulf, we are finding there are plenty of opportunities to excite British business interest. Our next mission to Saudi, in October, will coincide with Saudi Build, an important building and construction sector exhibition. Projects that are attracting particular attention there are the new metro lines in Riyadh, Jeddah and Mecca.”

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