Are things looking up for BRICS?
January 9, 2013, 11:19 am

Slowdown. Recession. Stimulus. Bailouts. Ratings downgrades. Fiscal cliff. These were the buzzwords of 2012. As Europe limped from one crisis to the next and the US economic recovery remained on precariously slippery slopes, the BRICS also struggled.

As a group, Brazil, Russia, India, China and South Africa – the five ‘BRICS’ countries – account for roughly a quarter of the world’s economic output, about 42% of its population and more than a quarter of the world’s landmass. Although the structures of their economies vary, and the group certainly does not perform as a monolith, they do share one thing in common. As emerging economies, their fates are largely tied to those of the developed world.

But we do not live in an isolated world economic order and that was also evident in the 2012 growth chart. The BRICS – to varying degrees – struggled to offset the losses though registering a comparatively impressive growth. The BRIC Index has risen 22% from its June 4 low and South Africa’s FTSE/JSE Africa All Shares Index has climbed 21% over the same period.

Are things looking up for 2013?

Brazil

Brazil did not have a good year in 2012. Third quarter gross domestic product (GDP) figures showed that South America’s largest economy grew by a mere 0.6%, quarter on quarter, during the three months ended in September. This was half the rate markets expected.

For 2012 as a whole, economists surveyed by the country’s central bank expect economic growth of 0.98%, down from 2.7% in 2011 and 7.5% in 2010. The Economist Intelligence Unit (EIU) suspects the country ceded its status as the world’s sixth largest economy – a position gained in 2011 – back to the United Kingdom in 2012.

Despite numerous stimulus measures by President Dilma Rousseff’s administration and record low interest rates, the country is still awaiting recovery. The problem, economists argue, is that private sector investment – which has fallen for five consecutive quarters to 18% of GDP – is too low. Absent increased investment, both short-term recovery and sustained growth over the coming years will be difficult to achieve.

In order to encourage growth in 2013, Ilan Goldfajn, chief economist at Itau Unibanco and a former deputy governor of Brazil’s central bank, argues that increasing the attractiveness of infrastructure auctions to the private sector is key.

Additionally, “small microeconomic reforms that reduce costs” would be effective, though he considers these less likely.

Looking ahead, Goldfajn expects growth to rebound to 3.2% in 2013, that the central bank will lower its benchmark interest rate to 6.25% by year’s end and that Brazil’s currency will end the year at 2.15 reais to the dollar.

Russia

Russia’s economy grew 0.9% in the third quarter of 2012 compared with the same period in 2011, the slowest pace of expansion since early 2010. Growth is expected to have slowed further in the fourth quarter, largely as a result of weakened demand for exports from Europe. Government expects GDP to have expanded by 3.5% for 2012 as a whole, down from 4.3% growth in 2011.

GDP will expand by 3.4% in 2013, according to the median estimate of economists surveyed by Bloomberg News in December. Economists surveyed by Reuters have forecast a 3.2% growth this year. Both groups expected lower growth than the government’s official forecast of 3.6%.

Moving forward, the principal threat to the Russian economy – according to the European Bank for Reconstruction and Development (EBRD) – is its dependence on oil and gas revenues, which account for nearly 70% of exports and half of government revenues.

The EBRD estimates that Russia’s known oil reserves are enough to sustain current production rates for just 20 years, making diversification of the economy critical. The concern is shared by President Vladimir Putin who has called “a real change in the structure of the economy” a key priority.

In the year ahead, economists expect Russia’s central bank to cut its 8.25% refinancing rate and its 6.5% fixed repo rate by 25 basis points each by the end of the second quarter of 2013, once inflation concerns have eased, and a diminished current account surplus to cause the ruble to weaken to 35.74 against the euro-dollar basket by year’s end.

India

India’s economy grew by 5.3% during the fourth quarter of the country’s 2011-12 financial year, which begins in April, and by an average of 5.4% during the first six months of the country’s 2012-13 financial year.

Speaking to reporters at a conference last month, the World Bank’s chief economist, Kaushik Basu, said that he estimates that Asia’s third largest economy probably grew by 5.5% in calendar year 2012 as a whole. Basu also forecasts 6% growth for India in 2013. For the financial year ending in March, India’s Finance Ministry predicts growth of 5.7 to 5.9%.

Despite disappointing performance in 2012, most economists are bullish on the subcontinent’s prospects for the year ahead. Goldman Sachs, for example, expects India’s economy to grow by 6.5% in 2013. “We think 2013 Indian GDP will probably exceed expectations,” Goldman Sachs Asset Management Chairman Jim O’Neill wrote in a research paper.

During the year just ended, India’s United Progressive Alliance government managed to overcome strong opposition to implement a series of sweeping reforms allowing increased foreign investment into a variety of sectors. These reforms are expected to boost investment in 2013, helping to spur growth.

Challenges remain, however. Inflation has remained uncomfortably high and recently released data showed that India’s current account deficit swelled to $22.3-billion in the quarter ended in September, the widest deficit since records began in 1949. The magnitude of the deficit poses a threat to the rupee, which Nomura expects to weaken to 59.00 to the dollar by year’s end, and limits the Bank of India’s room to reduce interest rates.

China

After a difficult 2012, things are looking up in the world’s second largest economy. “The slowdown in the Chinese economy appears to now have bottomed out,” the World Bank wrote in its latest East Asia and Pacific Economic Update. “While third quarter growth, at [7.4%, year on year], is still low compared to last year, [quarter on quarter] growth has picked up notably.”

The country’s National Bureau of Statistics will release fourth quarter GDP figures on January 18 and most economists expect the figures will mark the end of seven consecutive quarters of slowing expansion. For 2012 as a whole, Li Daokui, director of Tsinghua University’s Centre for China in the World Economy, expects China’s economy to have expanded by 7.8%, year on year. For 2013, consensus is for an 8.1% expansion.

In the year just ended, in addition to quickening approval for infrastructure projects to spur investment, officials cut interest rates twice and lowered banks’ reserve requirements three times since late-2011 in a bid to stimulate growth.

China’s new leadership – selected in a once in a decade leadership transition last year – is expected to favour reform over stimulus in 2013. If any additional stimulus measures are announced, analysts at Barclays believe they will be after the National People’s Congress meeting in March, when China’s leadership handover occurs.

Zhao Qingming, an economist at the China Construction Bank, expects China’s currency – the renminbi, to appreciate modestly in 2013. The country’s dwindling trade surplus – expected to remain below 3.0% of GDP in2013 – is expected to prevent any sharp appreciation in currency.

South Africa

In October, The Economist ran a front page picture of striking South African mine workers carrying traditional weapons under the headline, “Cry, the beloved country: South Africa’s sad decline.” The cover captured the fears of many in 2012. An even greater number hope that 2013 will be different.

In addition to adverse global conditions, South Africa faced widespread socioeconomic unrest at home in 2012. Violent strikes – which reached their nadir when 44 people were killed at Lonmin’s Marikana mines in August – caused major disruptions to multiple sectors, dragging real GDP growth down to 2.3%, year on year, in the third quarter of 2012. This marked the weakest quarterly expansion observed in Africa’s largest economy since the global recession of 2008 and 2009.

Analysts at Nedbank Capital expect “a moderate improvement in the final quarter of [2012].” In December’s Monthly Interest Rate Insights, economists wrote, “Nedbank still expects GDP growth of 2.5% in 2012, in line with the [South African Reserve Bank’s] downwardly revised forecast.”

The rand – one of the world’s most volatile currencies – could weaken further in the face of threats, both foreign and domestic. Credit Agricole expects the currency to hit 8.65 to the dollar in the fourth quarter.

Looking forward, most forecasters predict 3.0% growth for the country in 2013 and stable interest rates, at least through the third quarter.