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Friday, 6 September 2013

Is this the end of the BRIC’s as we know them?! Or was it all just a dream anyway?! Pt III

Due to other obligations, it took me a few days to write the final episode of this article range, but here it is.


After more than a decade in which its countrymen conquered the world of ICT services in Europe and abroad and in which its steel companies Aperam and Tata Steel Europe became household names on the European stock exchanges, it seems that India is starting to slowly lose its momentum from an economic point-of-view.

The following lines come from a story in Het Financieel Dagblad (

From a country, which became the epitome of soaring growth, India has degraded to an example of failing economic policy and loss of trust in emerging markets. The value of the Indian rupee has dropped by 20% since April, when compared to the euro and the dollar, and the Indian economic growth is expected to reach the lowest point in four years.

The exposure of India follows upon the unmasking of the other emerging markets. Growth in Brazil is dropping, while China has to battle with slower growth and a bubble in bad loans.

Last Thursday (August 29 – EL), the Indian central bank intervened: the bank sold dollars to prevend the rupee from dropping further. Analists claim, however, that this intervention won’t solve the structural problems. ‘India has a deficit on the current account and it has been hit very hard by the capital flight from the emerging markets’, according to Hugh Young, managing director of wealth management company Aberdeen in Asia.

 ’The weak reputation of the Indian government, when it comes to deploying reforms and spurring growth, didn’t help in this process’. Negative for India is that the US economy is improving. Many investors move their money back to the USA. The attempts of India to reduce this outflow had a reverse effect. Delhi decided to make it harder for companies and institutions to move money out of the country. The undesired side-effect was that foreign investors got scared that, in the future, they would not be able to return their investments anymore. This only increased the capital-flight.

To prevent the currency from collapsing, it is important that the Indian central bank immediately uses its currency reserves. Yesterday, this was stated by Adi Godrej, one of the most important industrials of Inda. ‘Without stabilization at the currency front, the economy will collapse. A giant inflation will occur and this will quickly lead to higher interests and a collapsing economy. This spiral must be prevented at all costs’.

Also a problem for India is that the corporate investments have dropped, according to economist Kim Jung-Dae of the Korean thinktank Seri. Where the investments grew by 15.5% in the five years before the credit crisis, the current growth tempo is 0.8%. It became clear that especially the foreign input plummeted, due to political reasons. 

The Indian government kicked the can down the road when it came to structural reforms. To reduce the budget deficit, the government first increased taxes on foreign companies, then reduced them again after protests, but finally increased them anyway. Jung: ‘this inconstancy puts the confidence among foreign investors really to the test’.


Also in the only BRIC-country outside Asia, Brazil, not everything is hunkydory, according to the FD.

The central bank of Brazil increased the interest rate for the fourth time in a row, in order to harness the enduringly high inflation. The most important interest rate is now 9% and it rose by 1.75% since April, 2013. In a reaction to this news, the Brazilian real dropped 1%, in comparison with the dollar.

Brazil has to deal with an inflation of 6%. At the same time the exchange rate of the real plummeted. This raises the costs of imported goods, which again spurs inflation. The central bank aims at an inflation of 4.5% with a maximum of 6.5%. ‘This decision will add to a decrease of inflation and will make that this trend continues the next year’, according to the policy-making committee in a communique upon the latest interest increase..

Besides the dropping currency, Brazil has to deal with a tight labour market and a insufficiently developed infrastructure. ‘These factors declare why Brazil has a combination of low growth and high inflation’, according to Herwin Loman, Latin-America specialist at the Dutch Rabobank. 

A higher interest can help to harness inflation and prevent from a further dropping real. However, it could also lead to heavy pressure on economic growth. Analysts reckon with 2% growth in 2013Q2 y-o-y, but they expect that the growth for the whole year 2013 might be lower.

Another article in the FD contains some lines about the Dutch exports to Brazil:

Dutch exporters have a hard time currently, after the very successful last years with strongly growing exports. Especially Brazil made a U-turn. The country has been dealing with weakening growth of the economy for some time and with growing deficits on the current account of the national payments balance. 

The value of the Dutch exports to Brazil grew fivefold between 2004 and 2012, turning the country into a larger customer than Portugal or Greece. However, in the first part of this year the exports to Brazil plummeted by 20%.


In the years after the huge credit crisis had started in 2008, the world was looking for new heroes and role models: countries, which embodied implicit promises of new growth and prosperity. Countries also which could carry the world into a new boom period for at least a decade or so, until the western countries themselves would have recovered from the credit crisis and could take over the leading role again.

The BRIC’s, with the manufacturing and services powerhouses China and India, renowned growth market Brazil and oil & gas behemoth Russia seemed the perfect examples for this. All four countries were huge in size and had (at least) hundreds of millions of inhabitants, who almost all came from a backward position and wanted to adopt the western lifestyle with their freshly gained wealth. When these circumstances would not enable new, powerful growth for the world economy, what else would?!

On top of that, all BRIC’s countries – seemingly except for India – wanted to show off with their newfound wealth and might. China organized the Olympic games in Beijing 2008, turning it into arguably the most expensive, (over)organized and gaudy sports event ever: a commercial-lasting-a-fortnight for the Peoples Republic of China and the Communist Party, which ruled it. 

Every kind of opposition from the Chinese dissidents had been swept away in advance and the sporters and IOC officials were all more than willing to not spoil the party and hail the ‘heavenly empire’ for its achievements.

Brazil and Russia didn’t want to lag behind their fellow BRIC: Brazil organized the Football World Championship in 2014 and the Olympic games in 2016. Russia gained the organization of the Olympic Winter Games in Sochi 2014 and the Football World Championship in 2018. It was a like a dream-come-true for the BRIC’s and the rest of the world.

Nevertheless, there were truly inquiring minds, like the renowned American economic blogger Mike ‘Mish’ Shedlock and Dutch macro-economist and BNR radio-personality Kees de Kort, who didn’t believe in the fairytale of the BRIC’s. Both men challenged on many occasions the boundless optimism and unprecedented trust in these countries. They disclosed that statistical data of especially China was often too good to be true and probably had been rigged. Both pointed at typical symbols of economic bubbles, like the totally vacant Chinese mega-cities, such as Ordos.

Unfortunately, now it seems that the BRIC’s have indeed been a bit of a dream after all.

All four countries are of course still very powerful and there is little doubt that these countries will reclaim the path to growth at shorter or longer notice.

Nevertheless, the latest economic data have been showing that these countries are not insensitive for the credit crisis that we are in, not even to mention the fact that these countries could even reverse the crisis for the rest of the world. The superheroes of the post-crisis economy have shown to be very human after all. From an economic point-of-view, there is no reason for too much optimism about the BRIC’s:
  • Especially India seems to have lost track lately from an economic point-of-view, as you have read in the aforementioned article, while at the same time Brazil has been bitten by the ghosts of excess inflation and low growth;
  • Russia has foremostly showed during the last decade, that wealth coming from gas and oil prices is as stable as the gas and oil prices themselves: if both prices go down, so will the built-up wealth, through a cascading effect akin to a house of cards. Russia has not been able yet to build up a stable economy, without being so dependent on their natural resources. It is very questionable whether this will happen under the reign of Vladimir Putin, who seems more interested in helping himself and his friends than in helping the rest of the country;
  • Brazil had its share of violent protests from the population during the last months. The people were increasingly enraged with the vast expenses and questionable revenues, coming from the organization of the two most important sport events in the world, while at the same time the poverty and awkward social situation of many Brazilians remained unchanged;
  • Also in Russia many people wondered why the expenses for the stadiums and facilities for Sochi 2014 multiplied by 3 or 4 times, when compared to the original forecasts. They also wondered who got rich from this ‘vanished’ money;
  • Some companies (a.o. courier TNT Express and African bank group Standard Bank) retreated from Brazil, as the costs of maintaining their operation there would outnumber the revenues from it in the coming years. Other companies, like the German steel giant ThyssenKrupp, reluctantly stayed in Brasil, but suffered heavy losses on their operation there.

  • Many of the so-called growth achievements of the BRIC’s were in reality caused by rising commodity prices and appreciation of the local currency, as you can read in this must-read article in the FD (in English):
    One might be inclined to interpret this amazing emerging-market performance as a consequence of the growth in the amount of real stuff that these economies produced. But that would be mostly wrong. Consider Brazil. Only 11% of its China-beating nominal GDP growth between 2003 and 2011 was due to growth in real (inflation-adjusted) output. The other 89% resulted from 222% growth in dollar prices in that period, as local-currency prices rose faster than prices in the US and the exchange rate appreciated. 

    Some of the prices that increased were those of commodities that Brazil exports. This was reflected in a 40% gain in the country’s terms of trade (the price of exports relative to imports), which meant that the same export volumes translated into more dollars. 

    Russia went through a somewhat similar experience. Real output growth explains only 12.5% of the increase in the US dollar value of nominal GDP in 2003-2011, with the rest attributable to the rise in oil prices, which improved Russia’s terms of trade by 125%, and to a 56% real appreciation of the ruble against the dollar. 

    By contrast, China’s real growth was three times that of Brazil and Russia, but its terms of trade actually deteriorated by 26%, because its manufactured exports became cheaper while its commodity imports became more expensive. The share of real growth in the main emerging countries’ nominal US dollar GDP growth was 20%.
  • Dutch and German exports to the Asian countries suffered heavy blows, also according to an article in the FD:
    In the first six months of this year, the Dutch exports to seven Asian markets – China, India, Indonesia, South-Korea, Malaysia, Singapore and Thailand – dropped by 9.7%. This is a remarkable reversal-of-fortune after the soaring exports of the last years. 

    Not only Dutch exporters are experiencing headwinds in Asia.
    Yesterday, the German statistical bureau Destatis came with data which seemed to indicate a similar trend. In the first half of 2013, the value of German exports to China dropped by 5.9%, while exports to India diminished by 8.6%.  

All these events show that there are no miracles after all, especially not in the most important economies in the world. After years and years of growth, the BRIC’s must shift back a few gears and get used to growth that is not ‘out of this earth’.

The true ´believers in eternal growth´ are currently aiming at other emerging markets; countries like Indonesia, Vietnam and Turkey, hoping that these countries will fulfill their desires.

Nevertheless, this has been a global credit crisis and no country has been able to totally withdraw from this crisis. This is something worth remembering, when the latest ´flavor of the week´ is entering the pages of the financial newspapers, screaming for your investment dollars and euro's.

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