By Martin Hutchinson
Editor, Permanent Wealth Investor
Money Morning, Investment News
When Goldman Sachs Group Inc. (GS) 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 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, 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.
[Editor's Note: When it comes to either banking or the international financial markets, there's no one better to hear it from than Money Morning Contributing Editor Martin Hutchinson, for he brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.
Just last month, Hutchinson published an analysis on the "Top 12 U.S. banks" report. If you missed story, which enjoyed a big response when it was published last Wednesday, please click here to access it and check it out. The report is free of charge. The follow-up story on that story was his analysis of Fifth Third Bancorp (FITB). The report on Fifth Third appeared last Friday. Both reports may be well worth your time to read.
And back in August, well before the ongoing global financial crisis reached the depths it has now achieved, Hutchinson authored a two-part series that detailed the strengths and weaknesses of the four “BRIC” nations. If you missed it – or just want to read the stories again – please click here to read Part I (Brazil and Russia), or click here to read Part II (India and China). The reports are free of charge.
Hutchinson also writes regularly for our monthly newsletter, The Money Map Report, in which he and other Money Morning colleagues also make investment recommendations for subscribers. 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.]
News and Related Story Links:
- Money Morning Special BRICS Report Part I of II):
Special Report: Hit the BRICs for a Global-Investing Double Play. - Money Morning Special BRICS Report (Part II of II):
Special Report: Hit the BRICs for a Global-Investing Double Play. - Wikipedia:
Bharatiya Janata Party. - Wikipedia:
Atal Bihari Vajpayee. - Wikipedia:
Indian National Congress-I (Congress) Party. - Money Morning News Analysis:
Russia’s Economic Demise Could Turn “BRIC” to “BIC”.
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17 Responses to As Problems in India and Russia Escalate, Let’s Drop the BRIC
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Hi,
The current massive and with no end in sight bale out strategy by the banks is crashing all economies as we know them. Behind the banks are primarily the oil companies. So we need a paradigm shift or “all hell is going to break loose” and there will be no winners.
The oil companies are supporting a suppressed technology that if released would give us all essentially free energy. Just sit back for a moment and think what that would mean for economies. It would mean a paradigm shift unlike anything in recorded history.
The oil companies have to let go now the easy way or later the hard way I think.
great concise actionable analysis
Martin, having Russia and India out of the game we must remember that China and Brazil huge reserves are denominated mainly in U$S. So, both countries economies are depending on the US economy not only because their fantastic export fluxes but also to the incertain future quality of their reserves blindage. Depending on how critical the exit of the actual crisis is, it is posible that there will be no longer a BRIC or any other acronym related to these countries.
What index are you using when you say China has risen by 20% this year? The iShares FTSE/Xinhua China 25 index is down 15% year-to-date as of 3/5/09.
During our time in the history of the world, we occupy front row seats and are face-to-face with the collapse of a material world which is falsely evaluated and measured.
That cultured “device” of false valuation is, of course, the thing we have been taught to hold most dear, and known as “money” or “currency” throughout the ages. It is the force within that “occupies” and drives us. Before we do this, or do that, or go here, or go there, we first, as individuals and as communities, do a consultation with the “device” to get its permission.
Traditionally, “currency” controls the full spectrum of human emotions. It causes restful sleep, or severely disturbs it, but moves people to get out of bed in the morning, nevertheless. Outstandingly nowadays, it either positions us to be extremely happy, or positions us poverty stricken and miserable, amid rapid-fire demise of any critically “sustaining” middle positions, which is where all the “real” work is done.
But we now witness the demise of money, either as a mindless currency flow that is rapidly drying up, or as a mindless currency flow turned tsunami that is destroying everything heart-felt upon which we depend, workers and all.
Any way you may see it, a one-time collapse is unfolding before our eyes which will give way to a new paradigm of order.
This report has many errors. India’s GDP has been growing at 9% per year. India is on a long term path of Industrialization. THe lowest estimate for GDP is 5.3% coming from the IMF. India projects 7.1% GDP growth for the year. The term “Hindu rate” of growth is a racist term coined by an anti-Hindu bigot. The Hindu rate of growth is 9% per year. Reforms are steady and continuing.
while your conclusions of india are correct based on present situation, you also need to realize that india is a healthy democracy. the same corruption which has pulling down india all these years may help india in the downturn.
after the irs case against UBS to reveal the names of the customers, there is a movement in india to do the same. indians have 1.4 trillion dollar hoarded in swiss banks. repatriation of a part of it is enough to stimulate the whole economy. since politicians are also involved in this, it maybe something that never happens. but the fact that there is a 5% probability of this being repatriated either due to the government action or bank failures in europe make me optimistic about india
Hey Martin
Keep away from using “hindu-growth” in a derogatory way. We’ve seen what the non-hindu boom and bust, fear and greed have resulted in. We’ve also seen how india escaped the bust and we’re also seeing how non-hindu nations are entering negative growth cycles. Each country has different basis on which the societies are founded and people need to understand the civilisations properly to make any conclusion.
I agree with Zhang Zemin that the word “Hindu Rate of Growth” is racist. It is demeaning. You do not refer to Brazil’s as “Catholic Rate of Growth” or USA’s as “Christian Rate of Growth”. It should be “India’s Rate of Growth” or “Indian Rate of Growth” or some such term that is indicative of professionalism. India, by the way, is a secular democracy addressing its age old societal problems in a democratic set up. Sensitivity training is indicated here.
The words “Hindu” and “India” are not interchangeable. One refers to a religion and the other refers to a country. This may not be recognized by all and that may be the reason the term the “Hindu Growth” is used in place of “Indian Growth”. I fully appreciated the point of view of the article and am in agreement with most of the points therein.
[...] 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. [...]
[...] and stock prices, accordingly. The best-run countries of Latin America – particularly Colombia, Brazil and Chile – may also benefit from Asian growth, without suffering high inflation or financing [...]
Sorry sir, I do not agree with you for the simple reason that a post mortom done pre-mortem is not valid in strategic thinking. Forecasting is a different ball game. Your article is not forecasting by serious study. Please do not be in a hurry and spread confusion, that too in a derogatory way. It doesn’t speak well about the media used for it. There is something known as psyconomics in anlysing money (Read my book to know more on economic security–you got to find it out). There was no BRICK anyway becasue the four countries had their own way of economic planning. I feel they will continue that path irrespective of governments. They should do well. Or rather not bad.
I agree with Paleri’s comment on the success of BRIC, as one need to the see how these economies are brought together, Brazil as a raw material power house, China as a low cost manufacturer, India as low cost services or more generally we can say the world’s back office and Russia, the oil reserve. What else you need to operate in this planet earth. Who would have though all these years that Brazil will be such a success in these 6 years and Japan after world war 2. However, they proved the world worng. Yes, I agree with all of you that we are indeed in deep financial crisis, but its wrong to write-off any country’s potential just on the basis of one bad economic cycle. The title of this article could be amended slightly instead of saying “Lets drop the BRIC”, should have said turbulence in ‘BRIC’ wall, which would have suit the article.
[...] Money Morning: As Problems in India and Russia Escalate, Let’s Drop the BRIC [...]
[...] Also, Russia’s continuing weakness is causing emerging market investors to look elsewhere. Since their high last spring, Russia’s stock prices are down nearly 80%, and Money Morning Contributing Editor Martin Hutchinson has crossed the Russian markets off his list of growth opportunities. [...]