Thursday, April 14, 2011

BRICS Leaders See Threat to Growth From Commodity Volatility

By Bloomberg News - Apr 14, 2011

The leaders of Brazil, Russia, India, China and South Africa said excessively volatile commodity prices pose a threat to the global economy and called for greater regulation of derivatives markets.

Volatility “poses new risks for the ongoing recovery of the world economy,” the leaders said, according to a communique from their summit in the Chinese resort of Sanya. The BRICS, as the five are known, also called for greater vigilance over the impact of the flow of capital from developed economies into emerging markets.

Rising food and fuel prices are pressuring importers such as China and India to hold down prices for their 2.6 billion people. Exporting countries such as Brazil, Russia and South Africa are benefiting from the trade, yet are concerned that over-reliance on resources will stifle diversification of their economies, leaving them vulnerable should demand drop.

“The fiscal outlook for emerging economies is more favorable, but this reflects in part the tailwinds of high asset and commodity prices, low interest rates and strong capital inflows,” the International Monetary Fund said in a report this month. A “reversal could leave fiscal positions exposed.”

China is the world’s biggest importer of soybeans and consumer of energy, depending on imported oil to fuel economic growth. India, where hundreds of millions of people live in poverty, has also expressed concern over rising food prices.

“Regulation of the derivatives market for commodities should be accordingly strengthened to prevent activities capable of destabilizing markets,” the document said.
Corn, Oil

Corn, coffee and cotton prices have all more than doubled on global commodity futures markets in the past year, while crude oil prices are up 42 percent in London. Wheat futures in Chicago may rise to $8.60 a bushel by Dec. 31, 31 percent up from this year’s low, Paris-based brokerage OTCex Group said earlier this month. Corn may reach a record $10 a bushel, Alex Bos, an analyst at Macquarie Group Ltd. said April 6.

This year China is forecast to import 57 million tons of soybeans, or almost 60 percent of global trade in the animal- feed and tofu ingredient.

The BRICS communique called for greater cooperation on food security to redress the lack of timely and reliable information on supply and demand. The international community needs to work together to increase production, increasing funding and technological support to developing countries as part of “establishing a more equitable and fair world.”
GDP Growth

The combined gross domestic product of the five so-called BRICS nations will eclipse the U.S. economy by the end of 2014, according to International Monetary Fund projections released this week. The eurozone will be overtaken this year, the data show. By 2016, the BRICS countries will have a combined GDP of $21 trillion compared to a projection of $18.8 trillion for the U.S., according to the IMF.

Deputy Prime Minister Sergei Ivanov said that oil prices over $100 a barrel are discouraging Russia from diversifying its economy. Ivanov said the current price was unsustainable and that Russia’s budget will fall into a deficit when it drops.

“When the gold rain is pouring on your head, you are not motivated to diversify,” Ivanov said in an April 7 interview in Miami. “I wouldn’t say I hate high oil and gas prices, but I am not happy with them.”

Bank of America Merrill Lynch said it expects crude to decline at the end of this year as price rises curb demand.

Brent will average $94 a barrel in the fourth quarter, analysts at the bank, led by New York-based Francisco Blanch, said in a report earlier this week. That’s about 23 percent less than the current price level.

Brent crude advanced to more than $127 a barrel on London’s ICE Futures exchange this week, the highest level since August 2008 and within about $20 of that year’s record price for Brent of $147.50 a barrel.
IMF Overhaul

Chinese President Hu Jintao and the other BRICS leaders also called for “more attention to the risks of massive cross- border capital flows,” and said the International Monetary Fund should continue to look to overhaul the role of Special Drawing Rights as an international reserve currency system.

“The governing structure of the international financial institutions should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries,” the communique said.

Hu is joined at the Sanya summit by Russian President Dmitry Medvedev, Brazilian President Dilma Rousseff, South African President Jacob Zuma and Indian Prime Minister Manmohan Singh.

--Andre Soliani, Michael Forsythe. With assistance from Regina Tan and Lyubov Pronina in Sanya and Simone Baribeau and Jerry Hart in Miami. Editors: Ben Richardson, Peter Hirschberg

To contact the reporters on this story: Michael Forsythe in Sanya at mforsythe@bloomberg.net Andre Soliani Costa in Sanya at asoliani@bloomberg.net