Emerging Markets: Another “BRIC” Hits The Wall

Goldman Sachs Group (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 taken different paths, and it’s no longer clear what traits they still have in common. We 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 visit the four countries, taking a look at each one, and see for ourselves whether there’s still any merit to the BRIC concept.

Brazil’s Emerging Market - An Economic Success Story

Brazil’s emerging market 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.

But the commodity boom of 2004 to 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 development story, albeit at a moderate (and sustainable) growth rate. What’s more, its oil company, Petroleo Brasileiro SA (PBR), has found enormous offshore reserves of oil. Production is expected to begin on those oil fields in 2012. It 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. Unfortunately, some of the other BRIC nations haven’t been faring as well.

Russia’s Emerging Market: A Shooting Star Flames Out

While Brazil has emerged as a success story, Russia’s emerging market showed early promise, but that 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’s Economic Machine: Political Ineptitude Blunts Growth

India did well from 2004 to 2008, thanks largely to the reforms carried out by the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee from 1998 to 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 Emerging Asian Giant of World Growth

My colleague, Keith Fitz-Gerald, believes China is 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. By increasing domestic demand the stimulus could 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 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 and has “hit a wall.”

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