Have BRICS Been Overshadowed by the Rest of the EM Pack?
Bonds & Loans
Published: 15 September 2017 05:09
Heads of state of the BRICS countries descended upon Xiamen, China earlier this month to discuss how to propel the bloc’s trade and commercial links forward. But with most of the organisation’s leading members knee-deep in political or economic mud, analysts are left wondering whether they have been overshadowed by the rest of the emerging market pack.
When the BRICS economies – Brazil, Russia, India, China and South Africa – created the formal trade organisation in 2006, they were viewed by analysts, economists and political leaders alike as a beacon for emerging markets. All of these economies were growing at enviable rates before the financial crisis in 2007; even today, they account for 45% of the increase in global growth since 2009 – bolstered mainly by China and India. They also account for 30% of the world GDP. A Goldman Sachs report from 2003 estimated that by 2050, Brazil, Russia, India and China would be wealthier than most of the western super powers.
The purpose for which the bloc was founded was to not only create stronger trade relationships between these nations, but to act as a countervailing force to western-led organizations like the IMF.
Fast forward a decade later, when BRICS leaders met in Xiamen for the ninth meeting of the group; one can’t help but get the sense that for all its promise, the bloc has fallen short – with many of the bloc’s namesake members mired in political scandal and bogged down by anaemic growth.
“We all heard how BRICS would shape the EM universe, but today it is the other way around – EM as whole has taken over,” Anders Faergemann, a Senior Portfolio Manager at PineBridge Invesment, explains.
Part of the challenge, Faergemann argues, is that China has far outpaced many of the bloc’s members. “Among the biggest problems for BRICS is, perhaps counterintuitively, the growth coming out of China. How can you continue when China is so much bigger than the other economies?”, Faergemann said.
China’s economy has dwarfed that of its BRICS peers; the Asian giant has roughly enough international reserves to equal the economic output of Brazil (USD1.7tn), Russia (USD1.3tn) and South Africa (USD295bn) – combined.
Even if Brazil, Russia and India have become significant players in their own right, China is simply more important to the global economy than all the other countries put together, resulting partly in China’s domination of the BRICS agenda and raising questions about the group’s credibility.
Removing the Debt Problem, BRIC by BRIC
The other significant issue these economies have encountered is their considerable debt stocks. As the commodity boom ended significant pressure was placed on almost every BRICS country because their economies are mostly export driven.
Overleveraging and distressed assets have become recurring themes throughout the BRICS universe, and each country has fared differently in their attempts to tackle these intermingling issues.
India’s rising stock of distressed debt is a significant issue. Distressed assets have risen to about 17% of the country’s total stock loans, the highest levels among all major economies, representing around USD180bn of toxic assets on lenders’ books. But the country has managed to implement a series of reforms aimed at quickening default resolution and forcing lenders to offload bad assets.
“India would be at the top, they have done a good job implementing reforms such as a new banking law and stricter non-performing asset rules. Despite the disruptions occurred due to the demonetization process our outlook on India remains positive,” Faergemann argued.
After oil prices fell and the rouble collapsed in 2014, many state-owned enterprises – including its crown jewel, Rosneft – and public-sector banks accumulated significant stocks of bad debt. However, due to Russia’s financial isolation – many of its domestic institutions remain under US sanctions – it has very low net external debt and its companies remain relatively healthy.
Brazil, which was set to become Latin America’s leading economy before the commodity crisis hit, has been battling one of the worst recessions in its history, which have resulted in the accumulation of significant stocks of potentially unserviceable debt, particularly at the state level.
To be able to tackle this ongoing problem, Brazilian President Michel Temer has set an ambitious reform programme which among other things include a public spending cap and an expensive pension system overhaul. Though the Central Bank has managed to control inflation, ongoing corruption scandals have put a dent in Brazil’s recovery path.
“Brazil seems to be on the right track, however, political risk could delay the implementation of the reform package,” the investor concluded.
According to Faergemann, China’s ballooning debt levels are still the most concerning of all – despite protracted attempts among the country’s regulators to reign in overborrowing.
Along with its economy, China’s debt has grown significantly over the past decade as a result of largely uncontrolled credit being doled out to state-owned companies in the wake of the financial crisis. And, while the government has tried to curb overheating in certain key sectors, analysts believe that by doing so, they could then stall growth.
“China has to adjust to less credit-intensive growth and boost private consumption,” the investor mentioned, while adding than to do so, the country may also need to improve its social safety net.
“As long as it keeps growing an average of 5.5% over a five year period, we are not going to see a crisis,” Faergmann concluded.
Exerting Greater Influence
Despite their ailments, the BRICS economies are among the most powerful nations in the world. However, if they wish to transform the group into a relevant powerbroker in the global arena and at the same time compete with their western counterparts, they will need to evolve and attract new members to the bloc while exerting greater influence through targeted global investment. This is exactly where the organisation could grow, with associate members of the bloc – like Indonesia, Mexico and Turkey – vying for a more formal, influential role in the group.
It is also one of the drivers behind the formation of the New Development Bank, formally referred to as the BRICS Bank, a multilateral lender focused on developing and deepening the markets of member states. In the week ahead of this year’s BRICS meeting, the bank announced loan disbursements for USD1.4bn for sustainable projects in China, Russia and India for the year ahead, and it featured prominently in the initiatives touted by Chinese President Xi Jinping during the summit. Whether the bank becomes another forum through which China can exert its lead over the rest of the BRICS, however, remains to be seen.
“We have launched the African Regional Centre of the New Development Bank (NDB), decided to set up the BRICS Model E-Port Network and reached extensive agreement on taxation, e-commerce, local currency bond, public-private partnership, and the network of financial institutions and services. Our practical cooperation has become more institutionalized and substantive, and delivered more tangible results,” Jinping said during his opening remarks, adding that the country will contribute another USD4mn to the NDB Project Preparation Facility to support its business operations.
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