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Global Economies 2015 – Once More Off-the-Cliff, Dear Friends…IV-a - BRICs (#39)


We covered in Part 1, the 2nd and 3rd largest economies of the World, China and Japan; in Part 2, the Euro Zone and the U.K.; in Part 3, the U.S., Canada and Australia. And now in Part 4, we shall look at the BRIC countries (Brazil, Russia, India and China), save China which was covered in Part 1. As to the other economies of Asia and South America we will cover them in the New Year in an additional White Paper considering the size and scope of some of those markets.

The consensus in the mid-2000s was, the BRIC economies were going to take over from the advanced economies of the West as the new prime drivers of global growth and wealth. To a degree that did take place, till the global financial crisis of 2008.

After the crisis, even though the BRICs held their own and kept a relatively high pace of growth, it became increasingly clear that it would be difficult for them to maintain that pace as the demand from the West fell sharply, and never did recover.

Over the recent years, two of the BRIC economies, Brazil and Russia, have faltered significantly. India slowed materially after the initial bounce back, post the crisis, but started to improve by mid-2012, and is now perhaps one of the fastest growing major economies. China, of course started its slide from its lofty heights of double digit rates of growth, and is going to continue to slow down materially.

On a combined basis, the output of the BRIC economies is shrinking, and we expect it to get worse as global demand continues to be sluggish, and capital leaves riskier markets, seeking safety in select developed economies, and the most liquid currencies. This flight to safety will put pressure on the BRIC economies, further eroding their capacity in this downturn.

In 2015, the combined economic output of the BRIC countries is estimated to be approximately $14.8 Trillion, which is getting closer to the output of the U.S. economy at about $17.8 Trillion, and just over 20% of the total global output. That percentage has shrunk in the latter part of this year as most of the BRIC economies contracted significantly, but there is no doubt that the future growth of the global economy is going to come from the emerging economies, including BRIC.

These four countries make up almost 50% of the World’s population and probably half of those (by Western standards) are really poor. That is where the new global demand is going to come from in the future, once the era of financial engineering to promote growth is over, and more traditional ways of economic restructuring, bottom-up rather top-down, have returned.

For now, the promise of the BRICs for the most part has been rescinded.

Two of its economies, Brazil and Russia, are in deep trouble, and if global economic conditions do not improve materially (and we don’t expect them to), these economies could struggle for a long time. If conditions worsen (and we certainly expect them to), these two economies could come apart further. China is also in trouble, and could be a trigger for a global crisis if internal conditions in China get worse, and instead of a ‘hard-landing’, it has a ‘crash-landing’.

As usual India is on a ‘slow burn’. It is the most stable out of the four due to its built-in slow-moving systems that prevent over-heating in any major area. That characteristic is usually India’s curse, as it has held India back for decades. But, in this instance, it may turn out to be an accidental blessing by preventing a major crisis from developing in India, as conditions continue to deteriorate externally. And though the conditions may not be as positive as the government numbers make it out to be, systems overall have improved somewhat over the past years.

The BRICs are a shadow of their former selves and, for now, will remain so. But let’s take a closer look at the individual economies.

Brazil is a land of magical wonders that fire the World’s imagination. It is the World’s fifth largest country by geographic area and population and the ninth largest by nominal GDP. Brazil has been the largest producer of coffee for the last 150 years. It is a country that is full of economic promise for its people and the rest of the World. A country endowed with tremendous natural resources, and a creative and energetic people that have built an economy that is a ‘heavy weight’ in South America, and a rising ‘middle weight’ amongst the major global economies. And of course it is still considered the ‘king’ when it comes to the game of ‘Futebol’.

But as in its performances in football in the past World Cup 2014, internal weaknesses have taken Brazil apart politically and economically. A few years ago, it was doing so well that the global economic experts hailed it as an up and coming ‘star performer’ amongst the BRIC economies. Prior to the 2008 crisis, Brazil’s economic output expanded steadily. After the crisis its economy like most others tanked, but then rebounded in a ‘V-shaped’ recovery only to plunge in 2010-11 in an inverted ‘V’, mimicking China’s, and most of the World’s GDP trajectories.

But as one can see in the next Chart its primary exports to China of iron ore, oil and soybeans kept surging, inflation was under control, the currency was relatively stable, standard of living was rising, and Brazilians were happy and hopeful. But exports peaked in 2011 and then turned sharply down as China (by then Brazil’s largest trading partner) started to slow. From late 2013, Exports plummeted as China’s economy started to shrink, and then went into a nose dive, taking Brazil with it. The escalating economic crisis uncovered Brazil’s political weaknesses which have materially added to Brazil’s current considerable problems.

As global conditions continued to deteriorate, and China’s problems mounted, forcing it to curtail imports further, from the middle of last year (2014), Brazil’s GDP has plunged into negative territory, aided and abetted by then, by Brazil’s growing internal political crisis, regarding corruption at the highest places, and multi-Billion dollar scandals in its largest company, Petroleo Brasileiro SA (Petrobras), in which the current government and the president are heavily implicated. All the political and economic turmoil is driving the economy into deep negative territory.

Predictably with the country in a growing economic and political crisis, manufacturing and services sectors, both, have been in a steady decline, with the drop having quickened in 2015.

As a result of its declining fortunes, the Brazilian currency has been losing significant value against the U.S. dollar. The ‘Real’ has lost more than a half its value since 2011, and is back to its weakest point which was in 2002.

With a weakening currency and deteriorating government finances, inflation is taking hold and gaining momentum. Inflation is now at above 11% and climbing.

With the economy falling steadily since 2010 and prices climbing inexorably, consumers have also been cutting back on personal expenditures, adding to the economy’s woes.

Brazil’s large and inefficient public sector, as well as private wages, which have kept rising, has become an additional burden in the era of falling revenues.

Brazil’s foreign reserves have shrunk at an alarming rate, as export revenues continue to drop, and the government finds itself under siege on a number of economic and financial fronts, including the defense of its falling currency. If Brazil runs out of foreign reserves, it will risk an international default, as it would not be able to pay its international obligations with dollars. To make matters worse, in September of this year, Standard & Poor’s cut Brazil’s credit rating to junk status, making it much more difficult, and expensive, for the government to raise money in local and foreign currencies. Brazil had been the proud recipient of an ‘investment grade’ rating in 2008, when it was the rising star among emerging economies.

Exacerbating Brazil’s current problems is the fact that it has a large percentage of its population that is very poor, like a lot of emerging economies, which experience great difficulty in taking care of themselves even minimally, and therefore they look to the government for employment, and extensive social services and support. In trying to take care of the basic needs of their populations, such governments enact large programs in areas of employment, health services, education and subsidies for fuel, food and transportation, at times with housing, and of course law and order. With extensive involvement of government, at all levels, comes bloated bureaucracy and really big government, and even larger public sector entities in business, with bloated payrolls and pensions, and poor productivity. It is legend that in most cases of emerging economies they are blighted with very poor governance, and all its byproducts - corruption, crime, legendary inefficiencies, and massive waste. Traditionally, Brazil, like most other emerging economies has been afflicted with it all. Currently, these problems are being magnified because of the global economic wasteland that has been developing since the 2008 crisis.

In the good times, a few years back, when revenues were robust from healthy and rising exports, under President Lula, the government spread its good fortunes amongst the people by upping wages, benefits and pensions. When those good times ended in 2011, and President Dilma Rousseff took over (bad timing), revenues plummeted, and tough times arrived, along with the exposure of massive multi-Billion dollar scandals. Charges of corruption coupled with the inability of government to maintain its largess, and the cut back in jobs and benefits, automatic in a contracting economy, brought on public anger and frustration, massive demonstrations and calls for the President’s head. Currently, President Rousseff is under the threat of impeachment.

To compound the problems, her government is paralyzed by a lack of support in Parliament for the critically needed reforms and austerity measures, to steady Brazil’s worsening financial position. The country is hurtling towards an economic and political ‘Armageddon’ as it stands now. Unable to cut back on government expenditures, wages, benefits, and pension commitments made in far better times, Brazil is economically and politically coming apart, just like their men’s football team did in their match with Germany in the last World Cup.

To be continued...

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