Has the Brics bubble burst?
Are the days of BRICS nations being
the darlings of investors over ? It looks like it. Brazil is experiencing it’s
own version of an Arab Spring, with Dilma Rousseff herself embroiled in a vast
scandal, she now faces the threat of impeachment. Russia is having a hard
time navigating between it overseas posturing vs the fallout from the
crude crash. South Africa is facing twin threats from the end of the
commodity super cycle and allegations of corruption at the highest levels.
Now that China is now longer hungry
the entire world is going on a slimming diet and this exercise is
causing undue jitters across asset classes. India although not yet a
galloping horse is a bright spot among the grouping but its promise hinges on
the ability of it’s PM to deliver on the promised reforms.
Amidst this chaotic background how
deep does the malaise run ?
The political crisis in Brazil over
economic mismanagement and high-level corruption, likely to come to a head next
week, has reinforced the fashionable view, popular among western governments
and businesses, that the Brics bubble has burst.
Members of the exclusive Brics club
of leading developing countries – Brazil, Russia, India, China and South Africa
– are failing to justify predictions that, separately and together, they will
dominate the 21st century world, or so the argument goes.
The Brics concept, plus acronym, was
dreamed up in 2001 by Jim O’Neill, chairman of Goldman Sachs Asset Management.
He highlighted the combined
potential of non-western powers controlling one quarter of the
world’s land mass and accounting for more than 40% of its population.
O’Neill’s idea morphed into a formal
association, with South Africa joining the original Bric group in 2011. The
five nations, with a joint estimated GDP of tn, set up their own development
bank in parallel to the US-dominated IMF and World Bank and hold summits
rivalling the G7 forum. Their next meeting will be in Goa, India, in October.
But ambitious plans to create an
alternative reserve currency to the US dollar and challenge American dominance
in IT and global security surveillance have come to little. Meanwhile, adverse
economic conditions compounded by falling global demand and lower oil and
commodity prices are taking their toll.
Last November, Goldman Sachs, where
the idea originated, closed its Bric investment fund after assets reportedly
declined in value by 88% from a 2010 peak. The bank told the US securities and
exchange commission it did not expect “significant asset growth in the foreseeable future”.
“The promise of Bric’s rapid and
sustainable growth has been challenged very much for the last five years or
so,” Jorge Mariscal, the chief investment officer of emerging markets at UBS
Wealth Management, told Bloomberg Business. “The Bric concept was popular. But
nothing is eternal.”
The problems facing Brics members are
remarkably similar, even though each country is different. Russia and Brazil
have both fallen into recession, while China, the principal engine of world
growth, has seen a sharp contraction in overall economic activity.
Brazil’s economic woes have been compounded by scandals that could yet force the resignation
or impeachment of Dilma Rousseff, the country’s president, and the trial of her
predecessor, Luiz Inácio Lula da Silva (Lula). With about a quarter of members
of Brazil’s congress facing some form of criminal investigation, the crisis has
become structural and existential in scope, raising worries about the
durability of Brazil’s young democracy.
Identical concerns have arisen in
South Africa where Jacob Zuma, the country’s president, and the ruling African
National Congress government are beset by allegations of corruption and malfeasance. Big
questions surround the influence wielded by private individuals and businesses
over government appointments and policies. The backdrop is under-performing
state-owned companies, a depreciating currency, falling exports and rising
inflation.
If this sounds familiar, look at
Russia, where the value of the rouble has plummeted due to lower oil exports –
on which the economy is unhealthily dependent. Oil revenues are said to be down
about bn in five years. State-condoned or tolerated corruption is a big issue
for Moscow, too.
Cost considerations may have been a
factor in the recent, surprise decision by Russia’s president, Vladimir Putin, to pull most of
his forces out of Syria. Russia’s economy also continues to suffer
as a result of western sanctions imposed following Putin’s 2014 annexation of Crimea.
A common factor for all Brics
countries as they struggle economically is institutional weakness, in
particular a lack (or in some cases, a total absence) of democratic
accountability, transparency in public life, and independent media scrutiny of
official behaviour. This holds especially true in China, where a fearful ruling
Communist party has cracked down on public debate, labour activists,
independent lawyers, and civil society organisations as economic woes triggered
by falling exports and market instability have mounted.
As in Brazil and Russia, the Chinese
authorities’ unspoken worry is spreading social unrest. This risk is increasing
as Beijing seeks to restructure unprofitable state-owned industries, such as
coal and steel, with the potential loss of millions of jobs. Meanwhile growth
targets of 6.5-7% in the 2016-20 13th five-year plan look optimistic.
Nor does the Brics group lack
internal challenges. Efforts at closer political cooperation have foundered
over differences about who is in charge, how best to achieve UN security
council reform and, for example, territorial disputes between India and China.
But not all the Brics are
floundering. As the analyst George Magnus noted in Prospect magazine, India currently presents a model of relative progress which the
others might study to their advantage.
“India is certainly no paragon of
virtue when it comes to corruption, nor is its economic infrastructure
efficient, but it is endeavouring to accelerate economic reform, and
competitiveness,” Magnus wrote.
“India’s economy is relatively closed
and so it is not as vulnerable to the slowdown in world trade; lower oil prices
have unequivocally benefited the country; and inflation, interest rates, and
deficits are falling. The government is trying to open up to more
infrastructure spending, foreign investment and an array of improvement
measures that should help the economy sustain growth rates of above 7%.”
Given their sheer size, their vast
resources, and their youthful populations, it would plainly be foolish to write
off the Brics, especially as a declining US grows more introspective and
Europe’s confidence falters. But economic performance cannot be the only
measure of success or failure.
To take their rightful place in the
21st century, the Brics countries must create more open, accountable, and
trustworthy systems of governance. This is a challenge of leadership, not
profit and loss.
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