BRICS’ dream hits a wall


Mexico, February 7th.- It was 12 years ago that Jim O’Neill had his innovative idea about the future economic powers, but reality has begun to catch up to Brazil Russia, India, China and South Africa, the  BRICS states.

Growth rates of the BRICS’ economies in 2013 were far below where they ever were before. Whereas China’s growth rate reached a high of 14% just a few years ago, it topped out at just 8% in 2013. In India, economic expansion fell from 10% to less than 5% in 2013; in Brazil growth went from a high of 6% to 3%. Such values are still higher than those seen in the European Union (EU), but they are no longer as impressive.

There is a new moniker being used to describe the developing giants: the “fragile five”. It was coined by James Lord, a currency expert at Morgan Stanley and is meant as a warning to the now brittle-seeming countries of Brazil, India and South Africa as well as to Turkey and Indonesia, both of which are threatened with collapse.

What has happened? Is it merely a temporary slow-down? Some have warned of overreacting, but the development raises questions for the global economy and for the people in those countries where economic success went at least partially hand-in-hand with increased political freedoms and a new self-confidence.

On Tuesday of last week, India’s central bank raised interest rates higher than expected in an effort to get massive inflation under control. That night, Turkey did the same thing, raising its prime lending rate to 10 percent. Soon thereafter, South Africa followed with an increase of its own. Developing countries have become uneasy and are doing all they can to slow investor flight and the collapse of their currencies.

In recent years, hundreds of billions was invested in the sovereign bonds of developing nations because returns in the established Western markets were comparatively weak. But last May, it took just a few words from then-Federal Reserve head Ben Bernanke to reverse the flow. He hinted that the US central bank could begin pumping less money into the financial system if the American recovery continued.

Now that the Fed has in fact begun to tighten monetary policy, a second wave of investors fleeing the developing world has begun. Increasing numbers of investors have begun pulling out of uncertain markets in the belief that US growth and climbing interest rates are a sure thing. Since Fed’s announcement, Brazil’s real, the Turkish lira and the South African rand have lost up to a quarter of their value.

It is an extremely dangerous development for the countries affected, particularly for those that import more than they export like India and Brazil. The gap, after all, must be filled with money from abroad.

That may explain why Brazilian President Dilma Rousseff unabashedly courted international investors at the World Economic Forum in Davos in mid-January. Addressing bankers and captains of industry as if it were some kind of IPO road show, Rousseff said emerging economies like Brazil “have the biggest investment opportunities.” She said her country had sufficient currency reserves and that the financial system is stable enough to weather the current storms. The president argued it would be a mistake to only pay attention to short-term developments.

It is “absolutely essential,” she said, “to bear in mind a medium and long-term time horizon in our reviews.”


Mexican Business Web via Der Spiegel

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