Monday, April 27, 2009

By Martin Hutchinson, Contributing Editor, Money Morning

When Goldman Sachs Group Inc. (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 diverged, and it is no longer clear what they have significantly in common. Money Morning 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 revisit the four countries again right now, take a look at each one, and see for ourselves whether there’s still any merit to the BRIC concept.
Brazil: Staying Strong

Brazil 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. The commodity boom of 2004-2008 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 growth story, albeit at a moderate rate. What’s more, its oil company, Petroleo Brasileiro SA (Petrobras) (ADR: PBR), has found offshore reserves of oil that from 2012 (when production begins) onward 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.
Russia: Shooting Star Flames Out.

While Brazil has emerged as a success story, Russia’s early promise 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: Political Ineptitude Blunts Growth

India did well in 2004-2008, thanks largely to the reforms carried out by the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee in 1998-2004. 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 Leader of the Pack

My colleague, Keith Fitz-Gerald, has christened China as 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, and that by increasing domestic demand the stimulus will 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 well 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.

[Editor's Note: When it comes to either banking or the international financial markets, there's no one better to hear it from than Money Morning Contributing Editor Martin Hutchinson, for he brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.

Just last month, Hutchinson published an analysis on the "Top 12 U.S. banks" report. If you missed story, which enjoyed a big response when it was published last Wednesday, please click here to access it and check it out. The report is free of charge. The follow-up story on that story was his analysis of Fifth Third Bancorp (FITB). The report on Fifth Third appeared last Friday. Both reports may be well worth your time to read.

And back in August, well before the ongoing global financial crisis reached the depths it has now achieved, Hutchinson authored a two-part series that detailed the strengths and weaknesses of the four “BRIC” nations. If you missed it – or just want to read the stories again – please click here to read Part I (Brazil and Russia), or click here to read Part II (India and China). The reports are free of charge.