Goodbye BRICS?

As economies struggle to cope with failing commodity prices, the BRICS concept is becoming redundant.

In 2001, the BRICS acronym was first coined by Goldman Sachs’ economist Jim O’Neill. It was thought that the economies of Brazil, Russia, India, China and later South Africa were at similar stages in their rapid development.

However, in November of last year Goldman Sachs decided to close the BRICS fund. This came as the fund declined from its peak of $800m in 2010, to just $100m. In recent years, each of the original four countries have been facing problems and money flows into the fund have been deteriorating.

Moody’s recently downgraded Brazil’s economy and is the third ratings agency to do so. They have warned that ‘Brazil’s government debt was likely to top 80% of GDP within three years.’ This unsustainable level of debt is likely to put downward pressure on its currency, thereby encouraging existing investors to exit. Whilst Brazil contends with what has been estimated as its worst recession since 1901, it has also been facing high levels of inflation, which rose past 10% in 2015. Shrinking real incomes have been reflected in the collapse of Chinese exports to Brazil over the past month, China being Brazil’s biggest trading partner. However, analysts doubt the government’s ability to overcome these problems. In the run up to elections in 2018, increasing levels of government expenditure are expected, thus perpetuating the overwhelming debt troubles.

Russia too is facing economic challenges of late. With oil prices plunging to record levels, investors have begun wondering whether it is possible for the situation to get any worse. Oil prices have already fallen by 11% since 1st January, to about $30 a barrel. This provides incredibly dismal prospects for Russia’s economy with 68% of its total exports being crude oil, petroleum products and natural gas. The decline in household incomes has reflected this, whilst poverty has increased by 50% since 2013. Yet the government is not in the position to afford major investments. The private sector is also suffering under sanctions that have been inhibiting growth and the weak rouble prevents firms from affording imported equipment that could increase efficiency.

India perhaps faces the most optimistic outlook of the five BRICS countries. Surrounded by highly volatile markets, the country’s economy seems stable. This can be attributed to the government’s fiscal policy and low inflation. India has desperately needed investment in public infrastructure, which the government appears to finally be delivering. It also seems to be addressing corruption by increasing transparency, whilst increasing predictability in its tax decisions and thereby restoring greater confidence in investors. However, in order to generate further growth into the long run and meet the challenges of a weak external environment, analysts argue that the country must further embrace competition and increase investment in health and education to utilise its optimal demographic. India can also not ignore its own internal problems illustrated by caste protestors taking control of water supplies, creating social and economic distress.

Recently China has been characterised by turbulent markets, and the country is growing at its lowest rate in 25 years. Financial and economic issues seem to be undermining the Communist leadership as questions begin arising as to whether Chinese policy makers have the skills to manage the quasi market economy. In turn, President Xi Jinping has been placing pressure on the Chinese media to focus relaying positive news. Despite the government gradually becoming more transparent over recent years by releasing information into the private sphere, reaction to the current turbulent period seems to be undermining this, as secrecy surrounding economic and currency information has increased. It has faced accusations of redefining, excluding, and adapting statistics, therefore creating greater uncertainty for investors. Concerns about growth have also led to threats that China will be forced to devalue the yuan, whilst there is increasing recognition that the economy is over dependent on low-end manufactured exports. China’s vice finance minister, Zhu Guangyao, has suggested that fiscal expansion must be implemented to move the economy away from such reliance on exports.

Faced with this, Steve Johnson of the Financial Times has suggested the TICKS as a potential concept to replace BRIC. As Taiwan, India, China and South Korea seek to focus on technology, rather than commodities, they may be the group to leading emerging economies in future years. However, this relies on the increased in interest in technology being the beginning of a long term trend rather than a short term reaction to the decline in the commodities market.

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