BRICS: Tumbling economies

In 2001, Goldman Sachs’ Jim O’Neill famously coined the term BRIC to characterize the world’s

four largest developing economies – Brazil, Russia, India, and China. But, more than a decade

later, just about the only thing that these countries have in common is that they are the only

economies ranked among the world’s 15 largest (adjusted for purchasing power) that are not

members of the OECD.

            

The four countries have very different economic structures: Russia and Brazil rely on

commodities, India on services, and China on manufacturing. Brazil and India are democracies,

while China and Russia are decidedly not. And, as Joseph Nye has written , Russia is a

superpower in decline, while China and (less markedly) the others are on the rise.

Yet, in a strange case of life imitating fantasy, BRICS – the original four countries, now joined by

South Africa – have formed a grouping of their own with regular meetings and policy initiatives.

Their most ambitious effort to date is the establishment of a development bank.

Business activity across the world hit a 16-month high in July, helped by improvements in the

United States and Britain, while business activity contracted in the BRIC countries of China,

India, Brazil and Russia.

The index measuring changes in employment slipped to 51.0 in July, compared with 51.6 the

previous month, indicating firms hired staff at a slower pace last month.

A group of five emerging world economic powers met in Africa for the first time, gathering

in South Africa for a summit meeting at which they plan to announce the creation of

a new development bank, a direct challenge to the dominance of the World Bank and

the International Monetary Fund.

The leaders of Brazil, Russia, India, China and South Africa, all members of the so-called BRICS

Group of developing nations, have agreed to create the bank to focus on infrastructure and

development in emerging markets. The countries are also planning to discuss pooling their

foreign reserves as a bulwark against currency crises, part of a growing effort by emerging

economic powers to build institutions and forums that are alternatives to Western-dominated

ones.

They have widely divergent economies, disparate foreign policy aims and different forms of

government. India, Brazil and South Africa have strong democratic traditions, while Russia and

China are autocratic.

The bloc even struggles to agree on overhauling international institutions. India, Brazil and

South Africa want permanent seats on the United Nations Security Council, for example, but

China, which already has one, has shown little interest in shaking up the status quo.

Africa, home to several of the world’s fastest-growing economies, drew less than 5 percent of

total investment from BRICS nations, the report said. France and the United States still have the

highest rate of foreign investment in Africa. Despite China’s reputation for heavy investment in

Africa, Malaysia has actually invested $2 billion more in Africa than China has.

Sinking Indian Rupee

Global investment bank Goldman Sachs has downgraded India to “underweight” saying growth

recovery remains elusive.

“Recent activity data in the second quarter of 2013 has been sluggish with no signs of a pick-up

in investment demand… Against a backdrop of lower growth, tighter liquidity and rising macro

vulnerabilities, we downgrade India to underweight,” Goldman Sachs said in a statement.

The investment bank had earlier revised its GDP forecasts for India down to 6 per cent from

6.4 per cent for the current fiscal year citing challenging external funding environment and a

weaker-than-expected pick up in the investment cycle.

Goldman said a high current account deficit is a key vulnerability for India. India’s CAD has

risen from 1 per cent of GDP in FY07 to 4.8 per cent in FY13. The primary driver of the current

account deficit is oil imports and, given their demand inelasticity, the level of the current

account may not change significantly in coming years, Goldman said. Rising CAD has put sharp

pressure on the Indian rupee, which is trading near a record low hit.

Goldman said the pressure on the rupee will likely continue, if US rates continue to move higher

and capital flows dry-up or potentially reverse thereby putting pressure on the current account.

“Our forecast for the dollar-rupee remains at 60 for the year but we expect continued

weakness to 65 through 2016. The rupee remains inexpensive relative to our fair value estimate

of dollar-rupee 65 which also suggests the currency can continue to weaken,” the investment

bank said.

The Reserve Bank may keep liquidity tighter for longer to stabilize the currency, Goldman said.

The RBI has also recently announced a number of measures to tighten rupee liquidity in order

to curb rupee weakness. These measures, in effect, constitute a shift in monetary stance from

pause to tightening, Goldman said.

“We even think that there is a greater probability of the RBI keeping liquidity tight even beyond

6 months, and hiking policy rates as well, rather than cutting them,” the investment bank said.

The Indian rupee has shown immense volatility in the past few months, with rupee dancing to

the global indications and in turn losing its own level. The sharp slide from 54.9 in Nov 2012 to

a crashing historical low of 61.21 has turned into a nightmare for the Indian government and

importers alike. Exporters on the other had have been reaping undeserving gains on behalf of

rupee which has taken a severe battering.

China struggling with maintaining GDP high

The 2014 gross domestic product (GDP) growth has now been forecast at 7.2 percent year on

year, down from the previous forecast of 7.7 percent, said Jing Ulrich, managing director and

chairwoman of global markets, China at J.P. Morgan .

The government has reiterated its improved tolerance toward the slowdown of GDP growth,

she said at a press conference after the government announced its second-quarter GDP growth

to be 7.5 percent year on year, reported Xinhua.

The official figure came down from the 7.7-percent growth logged in the first quarter, and it is

also lower than last year’s 7.8 percent, the lowest in 13 years.

Ulrich predicted the service sector and high-end manufacturing will be new growth engines and

should boost the country’s economic transformation.

J.P. Morgan has revised down its estimate onChina’s 2013 year-on-year economic growth

rate from 7.6 percent to 7.4 percent, lower than the government’s official target of 7.5 percent.

The latest GDP figures headed a string of other data showing a continuous slowdown in the

world’s second-largest economy after China’s full-year annual growth eased to 7.8 percent last

year, its weakest since 1999.

The Australian dollar, which is highly sensitive to Chinese demand for Australian raw materials,

rose on relief the GDP numbers were not weaker, following last week’s report of a surprise fall

in exports in June from a year earlier.

China’s statistics bureau said the economy’s performance in the first half of the year was stable

overall and that indicators were within a reasonable range.

New Premier Li Keqiang has been prominent in pushing for economic reform over fast-line

growth, suggesting the government is in no rush to offer fresh stimulus to revive an economy

in a protracted slowdown. With the latest GDP data, China’s growth has slowed down in nine of

the last 10 quarters.

The government’s official growth target for 2013 is 7.5 percent, impressive by world standards

but it would be the slowest pace in 23 years for China.

The latest data showed the economy grew 7.6 percent in the first half of the year from a year

earlier, just ahead of the full-year target. Chinese government has already announced about

USD 150 billion worth of stimulus package last year to be spent on various infrastructure

projects for reviving the economy.

Analysts have cut their forecasts for 2013 full-year growth in recent weeks following a run

of weak data and government comments on slowing growth. Ahead of Monday’s economic

figures, they were mostly forecasting 2013 growth between 7 and 7.5 percent.

Amidst the Egypt turmoil

The storming of the US embassy in Cairo has diverted attention once again from the real

issues facing Egypt. It couldn’t have come at a better time for those who want to convince the

Egyptian people to accept an International Monetary Fund loan, and extend former president

Hosni Mubarak’s liberalisation of the economy.

While the western media and politicians seem content to view Egypt through the prism of

political rights versus Islam, the economic causes of the revolution, the waves of strikes and

economic demands of the activists are barely discussed.

As Egypt’s banking sector struggles under the weight of a credit crunch, Arab banks are seeing

the crisis as an opportunity to acquire and invest in some of the country’s largest financial

institutions.

With the completion of the recent National Bank of Dubai purchase of BNP Paribas Egypt, there

are now six Emirati banks operating in the Egyptian banking sector, including the National Bank

of Abu Dhabi, Abu Dhabi Islamic Bank, The National Bank for Development, Union National

Bank, Mashreq Bank, and Emirates NBD.

Recently, NBD became the second foreign bank, after Qatar’s National Bank, to take over a

large piece of the Egyptian banking sector.

NBD, the UAE’s biggest bank in holding assets, will buy France’s BNP Paribas operations in

Egypt for US$500 million, or about 100 percent of the shares of BNP Paribas Egypt, the bank

confirmed.

Several local and regional banks are preparing to give the Egyptian government a US$330

million loan, in the second portion of a loan worth US$1.2 billion total.

The loan will be given by the International Islamic Trade Finance Corporation, which is affiliated

with the Islamic Development Bank, to help Egypt provide basic and strategic commodities.

The loan will be allocated to import wheat and food commodities after the first loan, worth

US$235 million, went to the Egyptian General Petroleum Corporation.

The crisis could not have come at a worse time, with economists prescribing strong medicine to

attack the country’s rising deficits and economic woes.

BRICS: Tumbling economies