Revisiting Emerging Markets, BRIC by BRIC

When Goldman Sachs Group Inc. 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, as 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 diverged, and it is no longer clear what they have significantly in common. Money Morning 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 revisit the four countries again right now, take a look at each one, and see for ourselves whether there’s still any merit to the BRIC concept.

Brazil: Staying Strong

Brazil 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. The commodity boom of 2004-2008 was highly beneficial to Brazil, and 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 growth story, albeit at a moderate rate. What’s more, its oil company, Petroleo Brasileiro SA (Petrobras) (ADR: PBR), has found offshore reserves of oil that from 2012 (when production begins) onward 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.

Russia: Shooting Star Flames Out

While Brazil has emerged as a success story, Russia’s early promise 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: Political Ineptitude Blunts Growth

India did well in 2004-2008, thanks largely to the reforms carried out by the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee in 1998-2004. 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 Leader of the Pack

My colleague, Keith Fitz-Gerald, has christened China as 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, and that by increasing domestic demand the stimulus will 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 well 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.

Original post

Comments

[Glen Bradford:]

I agree, for the people who want to buy china, buy PGJ instead of FXI. For the people that want to make a lot of money instead of just some money, I have some other ideas that are too small for seekingalpha. Nobody likes penny stocks. But, if I can get something that goes from a couple pennies to a couple dollars, and it should based on discounted cash flows... we'll see who is who.

Mar 08 07:08 PM

[HaavBline:]

By now these views about BRIC countries seems to be concensus.

I do have slightly different views about India and Russia. I believe Russia's biggest strategic mistake in economic development in the last 10 years has been its over dependence to European markets and lack of enthusiasm to develop Asian markets especially China market. Since Russia shares a long land border to China, natural resources supplies from Russia enjoys major competitive advantage than other far away places. If Russia had actively develope the China natural resources market. Their own economy would have been much more robust and would have stand Europe's current troubles much better. That is something that can changed with new policy directions.

India may face bigger structural problems. As late as last year, a lot of Indians bought into their own hype that their young and fast growing population give them a competitive advantage. If ever this is true, it is possible when the world enjoys high growth. Now that global growth is likely to be quite slow for many years, India will face very severe social stability problems as it will be impossible to create enough jobs for young Indians.

Mar 09 12:09 AM

[ceekay:]

In India's case I think the last few years have seen a lot of policy changes that are positive. I do not subscribe to the outdated view that deregulation = free market = good. It is not a "religious" issue. There is consensus across the Indian poitical spectrum that economic development is critical and growth is the basis for political success. Having said that political uncertainty is there before the elections. Anyway, had the Indian economy been tied into the global export oriented models driving some other Asian countries the situation would be very bad now.

Mar 09 11:59 AM

[Mad Hedge F...:]

This has got to be the p;ace to go. Traders looking for the Next Big Play are keeping a laser like focus on two key commodities. Chinese stockpiling prompted copper to break out of its recent trading range to the upside to $1.70, taking lead producer Freeport McMoran (FCX) up 30% on the week. Crude rose 15% to a high of $46. These impressive moves happened during a week when global equity markets were in complete freefall. This suggests that the bulk of the world’s growth will be in emerging economies, and that the next round of commodity buying will be even more ferocious than the last. Since I believe that the future is all about the ascent of hard assets over paper ones, this is music to my ears.

Mar 09 01:08 PM

[coreopsis:]

A perceptive comment not heard too often: Russia kind of blew it when it came to becoming a major trading partner of China, and getting good competitive position there. Reasons? Historically, Russia has always been conflicted between east/west and there has always been pressure to look west to Europe and ape European high culture. Obviously, ethnically most Russians feel closer to Caucasian people.

That said, there is still surprisingly good feelings/memories of the support that the USSR gave China in the 60s until their blowout. I've encountered this even in younger people who were not even born yet? Someone like Medvedev could make this relationship begin anew if there is political will in the body politic.


On Mar 09 12:09 AM HaavBline wrote:

> By now these views about BRIC countries seems to be concensus.<br/>
>
> I do have slightly different views about India and Russia. I believe
> Russia's biggest strategic mistake in economic development in the
> last 10 years has been its over dependence to European markets and
> lack of enthusiasm to develop Asian markets especially China market.
> Since Russia shares a long land border to China, natural resources
> supplies from Russia enjoys major competitive advantage than other
> far away places. If Russia had actively develope the China natural
> resources market. Their own economy would have been much more robust
> and would have stand Europe's current troubles much better. That
> is something that can changed with new policy directions.
>
> India may face bigger structural problems. As late as last year,
> a lot of Indians bought into their own hype that their young and
> fast growing population give them a competitive advantage. If ever
> this is true, it is possible when the world enjoys high growth. Now
> that global growth is likely to be quite slow for many years, India
> will face very severe social stability problems as it will be impossible
> to create enough jobs for young Indians.

Mar 09 03:55 PM

[Conan the B...:]

Before any long lasting agreements between China and Russia can evolve, the current generation of leaders must either be replaced or die.

China and Russia had armies massed on each others borders for decades.

just an opinion.

Mar 10 09:42 AM