A Huge Question For The Market: What's REALLY Happening With The BRICS Economies?

Indian construction workers

Photo: AP Images

With the rout in global markets, all eyes are on Europe and the U.S. But BRICS (Brazil, Russia, India, China, South Africa) nations have problems of their own.In the past few weeks, talks of a Chinese hard-landing have gained traction.

Most of these countries have intervened in the Forex markets to prop up their currencies. Many are struggling with inflation and geo-political risks are fairly high too.

Moreover, there are talks of tossing Russia out of the pack and replacing it with Indonesia.

We’ve put together the growth prospects of Brazil, Russia, India, Indonesia, China and South Africa.  We also include their inflation and unemployment rates and provide a quick overview of the biggest short-term risks to their economies.

Note: Unemployment, GDP and inflation figures are the most recently available via Bloomberg

Brazil

YTD Bovespa: -25.26%

GDP growth: 3.14% YoY

Annual inflation: 7.33%

Unemployment: 6.33%

Investment surged thanks to the upcoming FIFA World Cup and Olympics, but industrial production has been slowing. Inflation is high, defaults on personal loans have been on the rise and investors have moved away from the stock market on fears that commodity prices could impact the country's material producers. Fearing a slowdown at home and in the global economy, Brazil's central bank recently cut interest rates.

Another major issue for Brazil is its currency. Ideally, it would like to keep its currency weak and its exports competitive. Finance minister Guido Mantega has warned of currency wars and has butted heads with China accusing it of manipulating its currency, even taking the issue up with the WTO. But recently, it has intervened in the currency market because the sudden weakness in the real could make inflation even harder for consumers in Brazil.

Meanwhile, Brazil is also planning a new, unpopular mining code that aims to change licensing policy and hike royalty rates, which could impact operations of mining giants like Vale and commodity prices.

Source: GDP, inflation and unemployment data via Bloomberg

Russia

YTD MICEX Index: -20.45%

GDP growth: 6.1% YoY

Annual inflation: 7.2%

Unemployment: 3.4%

Russia's GDP is expected to ease to 4.1% next year, and analysts continue to argue that Russia should be ousted from the BRICs and replaced by Indonesia. Social discontent has been on the rise, its economy is vulnerable to shocks in oil prices, and oil money is reportedly running out.

Despite all the rumours that finance minister Alexei Kudrin's departure stemmed from his lust for power, a more reasonable explanation put forward has been that the economy is so bad he didn't want to be responsible for a policy he couldn't control.

With Putin expected to return as Russia's president next year, he has promised unshackle the economy from state control. But fears remain that foreign investors will pull out of Russia if Putin is re-elected. Russia also plans to have just one stock exchange to make its market as competitive as London and Hong Kong.

Source: GDP, inflation and unemployment data via Bloomberg

India

YTD Bombay Stock Exchange: -23.19%

GDP growth: 7.7% YoY

Annual inflation: 9.41% (wholesale price inflation)

Unemployment: 9.4%

India's central bank has categorically said that it will maintain its anti-inflationary stance as long as it needs to, despite the risk of short-run deceleration. GDP growth is expected to slow to 7.5% in 2012.

Despite interest rate hikes, food inflation has remained stubbornly high, but equally worrisome of late is wage inflation, and its impact on the economy. The IMF has pointed out that India's structural deficit is also a problem for inflation as it leaves little room for changes in fiscal and monetary policies.

Investors have also fled India as part of a larger movement out of emerging markets, but those who have chosen to stay, face rampant corruption, and with terrorist attacks and separatist movements, face geo-political risks to their businesses.

While its foreign direct investment laws, especially in retail, have protected domestic retails, they have deterred companies from expanding in to India. India has finally begun to focus on infrastructure but needs to improve it at a much faster pace to support its burgeoning population.

Source: GDP, inflation and unemployment data via Bloomberg

Indonesia

YTD Jakarta Composite: -7.63%

GDP: 6.49% YoY

Annual inflation: 4.61%

Unemployment: 7.14%

Analysts have for a while spoken of tossing Russia out of the BRICS and replacing it with Indonesia. Despite the rout in global markets, Indonesia's GDP is expected to ease just 0.1% to 6.3% next year. Rise in home prices have been contained because credit has gone towards infrastructure and industry. The strength in its labour market is expected to lead to an increase in consumer spending.

The country cut its corporate income tax rate as an incentive to foreign investors and has implemented reforms to make its economy more competitive. Like India and China however it continues to face inflation risks and its central bank is expected to resort to tightening its monetary policy in 2012.

While trade accounts for 58.4% of its GDP its dependence on Europe is limited as a majority of its trading partners are in Asia, though Japan continues to be its biggest export market.

Source: GDP, inflation and unemployment data via Bloomberg

China

YTD Shanghai Composite: -17.3%

GDP growth: 9.5% YoY

Annual inflation: 6.2%

Unemployment: 4.1%

Some are panicked about a Chinese hardlanding. Official figures expect GDP growth to slow to 9% in 2012 but a recent Bloomberg poll showed that GDP is expected to slow to less than 5% by 2016 with most of the slowdown taking place next year.

As China's central bank curbed lending to rein in property prices and inflation, its underground banking sector swelled to $470 billion. As many small and large businesses go bankrupt many are beginning to default on their loans. Developers could also face increasing liquidity pressure as prices and home sales decline.

China is also struggling to move from being an investment driven economy, to one more reliant on domestic demand for its growth. In the near-term it faces capital flight risk, as investors pull out of emerging markets and opt for safe havens instead.

Source: GDP, inflation and unemployment data via Bloomberg

South Africa

YTD Johannesburg Stock Exchange: -15.4%

GDP growth: 3% YoY

Annual inflation: 5.3%

Unemployment: 25.7%

South Africa is the only economy on our list that is expected to see its GDP growth accelerate in 2012, but rising structural deficit is a massive problem for the country, according to the IMF.

Finance minister Pravin Gordhan, however, said the country's economic growth forecasts are far too ambitious. He warned that weakness and volatility in global markets has impacted the South African economy affecting business and consumer confidence.

Unemployment is a massive problem. While it has been declined over the past four months, a lot of this has been attributed to seasonal jobs. Moreover, the country needs to improve its legal structure, property rights and infrastructure, to attract investors. And it needs to cut down on crime and address its HIV/AIDS epidemic.

Jim O' Neill who coined the terms BRICS has said (via WSJ) that he doesn't consider South Africa to be a BRIC member because it 'is not of the same economic magnitude of the other BRICs.'

Source: GDP, inflation and unemployment data via Bloomberg

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