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BRICS in the same boat
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BRICS in the same boat

Lionel Kruger Weekly bulletin July 2019
BRICS is the acronym for an association of leading emerging market economies: Brazil, Russia, India, China and South Africa. These economies were widely expected to lead world economic growth and for a number of years, with the exception of South Africa, they did just that. China and India put in particularly stellar performances. As a group, the countries have increased their share of world GDP from 8% to 23% and, according to IMF projections, by 2021 the BRICS nations will have accounted for almost half of world growth.

The future, however, is looking less rosy as all of these economies face declining output. There is also increasing evidence that the two largest contributors to growth have fudged their numbers substantially, with estimates for both China and India flagging overstatements of circa 2% per annum going back many years. A group of four economists recently published a paper arguing that China may have overstated its annual growth rate by an average of 2% per annum from 2008 to 2016, while India’s former chief economic advisor has concluded that the country’s growth rate was significantly overstated between 2011 and 2017. Arvind Subramanian, a respected economist, has reportedly stated that India’s annual growth between 2011 and 2017 was ~4.5%, compared with official figures of 7%. Furthermore, renowned Chinese economy expert Michael Pettis argues that China’s GDP is substantially overstated as bad debt has not been written off. He warns that if China’s bad debt were written down, GDP figures would be halved.

India has now also politicised GDP growth under Prime Minister Modi, with the RBI, India’s central bank, being placed under increased pressure to switch objectives from inflation targeting to a policy more focused on growth. The RBI has cut its benchmark rate for the third time this year and adopted a more accommodative policy stance in an effort to re-energise the economy. Indian GDP growth has dropped to its slowest pace in five years, in keeping with most of its BRICS associates. With the possible exception of China, the other club members, Brazil, Russia and South Africa all recorded contracting economic activity in Q1 2019.

The Brazilian economy, the world’s ninth largest by nominal GDP, has been disappointing throughout 2019, with GDP declining 0.2% and activity continuing to deteriorate. GDP growth for 2020 is estimated at 1.7%, a very low number for a populous emerging market. A crippling two-year recession in 2015 and 2016 saw the country’s economy contract by almost 7%, and its recovery prospects will be hampered by ongoing emerging market and developed market weakness.

The Russian economy is stagnating with GDP growth of only 0.5% in the first quarter of 2019. Putin’s ongoing standoff with the West has strengthened statist, nationalist and protectionist trends, delaying Russia’s transition to a more market oriented economy. The private sector continues to be marginalised. Key risks to medium-term growth include ongoing economic sanctions, weaker oil prices and a souring global trade environment.

South Africa, Africa’s most advanced economy and the smallest of the BRICS nations, has suffered a decade of political and economic mismanagement and massive state theft. It is a country blessed with mineral wealth, and yet one which managed to miss the benefits of the spectacular commodities super cycle up to 2008 due to a hostile mining regulatory environment. GDP growth has remained tepid since its recovery from the 2008 crisis, averaging well below 4% per annum. GDP has once again slumped sharply in the first quarter of 2019, contracting by 3.2% from the previous quarter, the largest quarterly decline since 2009. The much hoped for economic recovery following President Ramaphosa’s ousting of Jacob Zuma has not materialised as the scale of destruction of the state owned companies Eskom, SAA, SABC, Transnet, Denel, etc., has become almost an impossible challenge. The new President also faces significant resistance to change from factions within the ANC still loyal to the former President and determined to continue their pursuit of self-interest. There is significant pressure within the ANC to impinge on the independence of the Central Bank and follow in the footsteps of India, politicising GDP and targeting growth to the detriment of price certainty and inflation. This could prove to be particularly disastrous for a country that is the beneficiary of large carry trade flows, which are needed to balance the negative trade and current account balances. GDP is expected to recover to 0.9% for 2019 and 1.7% for 2020. However, these levels are too low to address poverty and an extremely high unemployment rate.

The BRICS, after having started their association so strongly, now face a number of challenges. They will have to navigate growing trade uncertainties, and increased protectionism.

Economic data releases
This week is a fairly quiet week on the data front with only the US employment report due on Friday likely to provide any significant market direction, although this will be largely off-set by the US 4th of July holiday on Thursday.

For more information, please contact Lionel Kruger, Director at JCRA, at lionel.kruger@jcrauk.com.

 

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