Be optimistic on BRICS

The discussion about the economic slowdown on BRICS (acronym for Brazil, Russia, India, China and South Africa) and whether these markets will be able to overcome their own challenges is becoming repetitive. It is true that the emerging markets’ economies have been decreasing, but it is important to consider that most of these countries are growing more than the developed nations.

The financial crisis has hit all the economies around the world, especially the export-oriented ones such as BRICS. This scenario has been seen since the second half of 2011, and particularly in this year, when many emerging markets started to fight against the slowdown in their gross domestic product (GDP).

There are, however, many reasons to be optimistic about BRICS. Firstly, the five countries did their financial homework. Their economic fundamentals are now more solid compared a decade ago. Together, the BRICS’ countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion.

Secondly, BRICS still have room to use macroeconomic tools to stimulate their economy. Brazil, for instance, has been reducing its interest rates sharply in order to fight against its economy slowdown. Over the past year, the Brazilian central bank cut the county’s interest rate by 525 basis points, more than any other group of the 20 nations. The Brazil’s benchmark Selic interest rate is 7.25%—a historic low level, but still high compared to other emerging and developed markets. Besides, these five countries have been using expansionary fiscal policy to stimulate their GDP.

Thirdly, commodities prices might remain high. As the emerging markets are still growing, these countries will support the demand for commodities. Oil and metals prices might continue volatile, but the forecasts for agricultural commodities are still good.

Another reason to be positive on BRICS is their powerful consumer market. Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global GDP. According to some economists, Brazil might just grow 1.5% this year, yet retail sales are projected to increase from 7% to 8%. China and India’s population is massive, which puts these countries ahead of the game.

Finally, the BRICS countries have been working to increase their cross-border investments or even to create an alternative lender (the BRICS development bank) to the World Bank and other finance bodies. The bank might initially start with US$ 50 billion in capital.

BRICS: a factory of millionaires

The US dollar appreciation, the euro depreciation and the real estate prices slowdown have affected the number of millionaires around the world. The good news is that the number of wealth individuals might experience an increase in the next years. A research conducted by Credit Suisse shows that the number of millionaires worldwide is expected to increase by about 18 million, reaching 46 million in 2017. The world wealth, in its turn, may totalize US$ 330 trillion by 2017.

The future is particularly promising to emerging markets, especially to the BRICS (acronym for Brazil, Russia, India, China and South Africa). According to Credit Suisse, only China might add a total of US$ 18 trillion to the stock of global wealth in the next five years and surpass Japan as the second-wealthiest country in the world. The USA should remain on top of the wealth league though, with US$ 89 trillion by 2017.

“Assuming moderate and stable economic growth, we expect total household wealth to rise by almost 50% in the next five years from US$ 223 trillion in 2012 to US$ 330 trillion in 2017”, says the report. The emerging markets, however, have been raising their share of world wealth. “Over the next five years, we expect to see a big improvement in the position of emerging economies (…) We expect that emerging economies will continue to catch up with developed economies, that the middle segment will increase in importance and that the number of millionaires will rise significantly.”

Brazil has been called the “awakening giant” by the report since the country is expected to have a higher level of advance in the number of millionaires in the next five years. According to the research, Brazil will gain 270,000 new millionaires in the period, from 227,000 millionaires to 497,000 in 2017, an increase by 119%. This percentage is the highest one within the BRICS countries. “Similar to a number of other Latin American countries, Brazil has more people in the US$ 10,000–100,000 range relative to the rest of the world, but fewer numbers in each of the other ranges”, says the report.

Russia might experience a sharp increase in the number of millionaires as well. The forecast is that the number of wealthy people will advance 109% from 97,000 in 2012 to 203,000 in 2017. According to Credit Suisse, excluding small Caribbean nations with resident billionaires, wealth inequality in Russia is the highest in the world. “Worldwide there is one billionaire for every US$ 194 billion in household wealth; Russia has one billionaire for every US$ 15 billion. Worldwide, billionaires collectively account for less than 2% of total household wealth; in Russia today, around 100 billionaires own 30% of all personal assets.”

In India, the number of millionaires might grow 53% in the same period, from 158,000 to 242,000 by the year 2017. The study says that wealth growth has been quite steady since 2000 in India, increasing at an average annual rate of 8%. “Together with most countries in the developing world, in India, personal wealth is heavily skewed towards property and other real assets, which make up 84% of estimated household assets.”

The predictions for China continue to be encouraging. According to the report, the number of Chinese millionaires might increase 97%, from 964,000 to 1,901,000 in the next five years. According to the research, China’s total household wealth is the third highest in the world, 25% behind Japan and 59% ahead of France (in fourth place). Due to a high savings rate and relatively well developed financial institutions, a high proportion (47%) of Chinese household assets are in financial form compared with other major developing or transition countries”, says the report.

The report refers to South Africa as one of the most successful African economies and an exciting emerging market. “Unusually for a developing country, household wealth is largely comprised of financial assets, which contribute 70% to the household portfolio. This reflects a vigorous stock market and sophisticated life insurance and pension industries, which are key aspects of the strong modern sector of the economy.”

The report considers “wealth” the value of financial assets plus real assets (principally housing) owned by households, less their debts, and private pension funds. The research was made from 2011 and 2012, and refers to mid-year (end-June) estimates.

BRICS development bank: a dream comes true?

One more step was taken by the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) to create their own development bank. Authorities from the five nations were in Tokyo, and they reported that some progress toward the creation of the bank was done. According to the Brazilian business newspaper Valor Econômico, the bank might initially start with US$ 50 billion in capital.

The idea is to establish a joint bank which could provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries. At the same time, the BRICS development bank might be an alternate lender to the World Bank and other finance bodies, although some analysts are skeptical about it.

The BRICS countries have different objectives. While India sees the bank as an economic project, China has a political view of it. The five nations, however, can change their role in the World Bank and in the International Monetary Fund (IMF).

The BRICS countries are important borrowers from the World Bank. In 2011, over US$ 7 billion were approved to them. The five nations have been increasing their contribution to IMF, and they want the fund to reform its quota system to enhance their representation. They are demanding voting shares in IMF, for instance. Starting a new development bank might provide a bargaining power.

As the contributions to the development bank will probably be equal, the countries will have an equal voting structure. On the other hand, this can limit the size of the bank, since China has more reserves than the others. Together, the five countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion. Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product.

If it becomes a reality, the institution would be the first major multilateral lender to emerge since the European Bank for Reconstruction and Development in 1991. The BRICS will meet again in Mexico City next month.

Where is the ‘decoupling’?

Some years ago, when the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) were growing very fast and the developed countries were struggling to accelerate their economies, many economists said that the “decoupling” thesis was evident and clear, with emerging and developed markets moving in opposite directions. China, analysts said, could be the new economic world’s driver and the country would beneficiate especially from its suppliers, which meant the others emerging markets.

It is clear that the “decoupling” thesis was premature and inappropriate, as an article by Financial Times showed today.  The global slowdown has hit the major emerging markets economies hard, although most of them will continue to grow more than the developed countries. China’s gross domestic product (GDP), for instance, might grow around 7% or 7.5% this year in contrast to the near 10% average annual growth seen in recent years.

Brazil is the most problematic case within BRICS. After growing 7.5% in 2010 and 2.7% in 2011, Latin America’s biggest country has been struggling to put its economy on track again. In the last months, Brazil has been using all kinds of monetary instruments to revive its economy. The Brazilian central bank has been reducing interest rates sharply in order to fight against its economy slowdown, but all these efforts have been creating another problem, inflation.

And there is more bad news. Today, the International Monetary Fund (IMF) reduced its world economic forecast. According to the IMF, the global growth might reach 3.3% in 2012 compared to 3.5% in its previous estimate. In 2013, the world might grow 3.6% compared to 3.9% in its last report in July. The IMF’s new estimates suggest a 15% chance of recession in the United States next year, 25% in Japan and above 80% in the Euro area. The forecasts are part of the fund’s World Economic Outlook report, released four times a year.

For Brazil, the IMF reduced its forecast from 2.5% in its last estimate to 1.5% this year. The Brazilian economy has the lowest growth forecast compared to its peers in the BRICS group.  

The IMF’s downgrade for India has been the most aggressive within the major economies. The fund expected India’s economy to advance 4.9% in 2012, 1.3 percentage points less from the July forecast. India has had the worst mid-year recast by the IMF for any major economy.

For Russia, the International Monetary Fund (IMF) reduced its forecast in 2012 from 4% to 3.7%. The institution has also revised its estimates for Russia's growth in 2013 from 3.9% to 3.8%. The last time India’s growth rate fell below 5% was during the global financial crisis in 2008.

According to IMF forecasts, South Africa might grow 5% this year, while in July the projection was 5.4%. China, on the other hand, will face a “soft land” and grow 7.8% this year and 8.2% next year. In July, the IMF had forecasted growth of 8% in 2012 and expansion of 8.5% for 2013.

Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product. Together, the five countries have the world's highest volume of reserves, which sums up to more than US$ 4 trillion.

As the Financial Times article says, it is clear that “the declarations of ‘decoupling’ from the west were premature”. The article reminds us that European Union remains collectively the largest economy in the world, and that a recession there and a slow growth in the United States inevitably affect the BRICS nations. In a globalized world, every problem echoes from one country to the others, sooner or later.

http://www.imf.org/external/pubs/ft/weo/2012/02/index.htm

http://www.ft.com/intl/cms/s/0/af6e8b08-1136-11e2-8d5f-00144feabdc0.html#axzz28pLvZKq8

“BRIC nations aren’t hitting a growth brick wall”, says Mobius

After fast growth in the last few years, the BRIC countries (Brazil, Russia, India and China) are facing a maturation time. The global slowdown has hit the major emerging markets economies hard, but the BRIC nations have not hit a brick wall in terms of growth, says Mark Mobius, the executive chairman of Templeton Emerging Markets Group who directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios.

According to Mobius, although the growth forecast for the BRIC countries has disappointed investors, some deceleration in China’s growth rate was almost inevitable. On the other hand, Brazil is the one nation within the group which gives investors most cause for concern. “(Brazil’s) GDP growth in recent years has been below that of India and China, and a populist and interventionist tradition in government has left the country with unusually high taxes, a relatively high minimum wage compared to its peers, and potentially troublesome pension and benefit entitlements for public sector workers”, says the executive.

Another problem in Brazil is the nationalist policies in some key industries, especially energy, which tended to slow and complicate some investment programs. “The government has been moving to address some of its challenges, notably with measures to curb pension costs for state employees, and there are signs of a renewed appetite for privatization. Meanwhile, we believe domestic consumption could advance, supported by a young and dynamic working population, powering a gradual diversification of the economy”, says Mobius

Brazil, from the four emerging markets, may also be more vulnerable to fluctuations in the prices and demand for commodities. “However, in our opinion, we don’t see short-term commodity pullbacks leading to long-term weakness, as growth in several other emerging economies appears likely to continue to support demand”, says the executive.

In China, some deceleration in the growth rate was already expected, given the size of the country’s workforce. “In this context, forecasts of around 7% annual growth this year (as opposed to the near 10% average annual gains seen in recent years) seem entirely rational to us”, says Mobius. The executive chairman of Templeton Emerging Markets Group reminds that China’s last Government Work Report, the Chinese Premier Wen Jiabao projected a 7.5% growth rate for 2012. To Mobius, however, this forecast might prove to be conservative.

In contrast to China, India’s troubled government has been struggling to implement necessary investment and infrastructure projects. A number of populist and anti-business initiatives has also eroded investor confidence in recent months. “There was also concern that measures to support consumption were crowding out private sector investment and leading to balance-of-payments deficits”, says Mobius.

According to Mobius, while more reforms could be made, the actions of the Indian government and its central bank represent positive steps to restore the investors’ confidence. Moreover, the government measures can potentially set the stage for better growth going forward. “Despite its obstacles, India’s economy has proved adept at generating growth in recent years without heavy investment and with a much better ratio of growth to capital spending than China.”

In Russia, the recent gross domestic product (GDP) numbers shows the economic growth remains strong. “A heavy dependence on the oil and gas industry could represent a risk factor, as oil accounts for the bulk of Russia’s exports and a considerable portion of federal budget revenues”, says Mobius. “However, we feel that an oil price crash is unlikely, at least in the near or medium-term. In addition, the government recently announced ambitious economic reforms aimed at addressing the country’s dependence on commodity exports”.

According to Mobius, the BRIC nations aren’t hitting a growth brick wall, but if emerging markets in general continue to achieve strong economic growth in the coming years, the BRIC countries will have to scale a few obstacles.

China offers the best opportunities

China’s economic growth has not increased as much as it did in the last few years, but the country still offers the best opportunities to investors. This is the opinion of Jim O’Neill, chairman of Goldman Sachs Asset Management who coined the acronym BRIC ten years ago. China’s gross domestic product (GDP) might grow around 7% or 7.5% this year in contrast of the near 10% average annual growth seen in recent years.

According to an article published by Forbes, O’Neill believes the size of the Chinese economy put the country in a unique position to deal with the economy slowdown after the European debt crisis. The chairman of Goldman Sachs had showed his preference for China to a group of investors in Singapore this weekend.

China’s government is trying to move the country away from an export driven economy to one that focuses more on domestic consumption.

http://mobius.blog.franklintempleton.com/2012/09/26/brics-economic-growth/?nicamp=other&nichn=markmobius&nismseg=twitter_brics

http://www.forbes.com/sites/kenrapoza/2012/09/29/goldman-sachs-jim-oneill-china-best-bric/