Tag Archives: BRICs

The Weekly Mishmash: November 29

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1. A story of Brics without mortar
Philip Stephens, FT

Does it make sense to lump the BRICs together? Not really, says Stephens.

He points out that Brazil, Russia, India and China have little in common other than impressive rates of economic growth. They are not united politically, and he doesn’t see them reliably allying together. Rather, he sees a more multi-polar world where “rising states want to do some things together and some things with the west.”

EM Muser: I completely agree with Stephens that it’s a mistake to view the BRICs as a united political bloc. As the economic power of many emerging markets grows, their political clout will grow as well. However, it should not automatically be assumed they will work together.

We’ve seen a number of recent examples that highlight the lack of coordination among the BRICs. This spring, many EMs would have loved to place one of their own at the helm of the IMF, but they disagreed on who. Overall, it looks like we’re headed toward a more multi-polar geopolitical arrangement – characterized by shifting alliances and no clear dominant power – which likely means a less stable world.

2. South African lawmakers approve ‘secrecy bill’ to protect state
David Smith, Guardian

South Africa’s lower house of parliament passed a controversial ‘Protection of Information’ bill on November 22. The media – as well as human rights organisations, unions and renowned national heroes like Desmond Tutu and Nelson Mandela – see the bill as a major setback for freedom of expression and the fight against corruption.

Daniel Bekele, Africa director of Human Rights Watch: “The manner in which the government pushed this bill through parliament instead of proceeding with consultations as promised, as well as the secrecy embedded in this legislation, send very worrying signs about the government’s commitment to transparency.”

EM Muser: This so-called ‘secrecy’ bill is yet another sign that political risk in South Africa is on the upswing, which is negative for the investment climate. In late October, President Zuma sacked two cabinet ministers for misuse of public funds. Corruption is an ongoing problem, and this bill will make it harder to stamp it out.

The ANC continues to dominate South African politics, winning 66% of the vote in 2009. However, what was once a dynamic party is looking increasingly sclerotic, between allegations of corruption to growing dissension within the party ranks (see The Weekly Mishmash: November 13). Just because the governing party has a large majority in no way ensures a predictable policy environment. Look at Hungary.

3. Not amused: China’s theme park industry should be making easy money
China Economic Review

Over-investment in China is not limited to ghost towns and highways to nowhere. Apparently it also extends to theme parks. Many are boondoggles, and regulators are cracking down. “[T]heme parks larger than 20 hectares or requiring more than US$78 million in investment must obtain national-level approval or halt construction immediately.”

EM Muser: There has been lots of talk about fizzy conditions in China as well as corruption among government officials. The theme park bubble is just the latest example. 

4. Fitch Revises Turkey’s Outlook to Stable; Affirms at ‘BB+’
Fitch Ratings

Fitch held Turkey at one notch below investment grade, but cut the ratings outlook to stable from positive last week. This contrasts with S&P, which upgraded the country’s local currency rating to investment grade in September.

Despite strong government finances and a healthy banking sector, “Turkey’s large external financing requirement leaves it vulnerable to the deterioration in the global outlook,” according to Fitch.

EM Muser: While I am upbeat about Turkey’s medium-to-long term economic prospects, I agree with Fitch that the economy looks vulnerable in the short-term.

As I noted in a recent post, Turkey’s high current account deficit (which Fitch expects to reach almost 10% of GDP in 2011) combined with limited foreign reserves and high amounts of short-term external debt leaves the economy very exposed to a dry-up in external financing. (See Which Emerging Markets Appear Vulnerable? A Look at Early Warning Indicators)

The Weekly Mishmash: November 22

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1. BRICs’ rapid growth tips the global balance
Jim O’Neill, Goldman Sachs

Jim O’Neill is best known for coining the term BRICs a decade ago, when he predicted Brazil, Russia, India and China would be the world’s future growth drivers. He highlights the critical importance of population dynamics in making his call: “Simply applying the most credible estimates of long-term demographic trends, especially for the working population, is the intellectual cornerstone of the argument for the BRICs’ potential.”

EM Muser: Demographics is an oft-ignored area of economics so it’s interesting to hear O’Neill cite it as a ‘cornerstone’ of his BRIC thesis. I think it’s paramount for long-term investors to look at a country’s population dynamics.

The demographic profiles of EMs vary greatly. Many countries in Eastern Europe have profiles similar to those of advanced economies. This will make it hard for them to avoid the public finance strain, productivity loss and slowing economic growth typically associated with aging populations. However, other EMs are still enjoying a demographic divided given their young and growing populations (eg. Brazil, Indonesia, Turkey).  (See my related post: The Double Whammy: Debt and Demographics)

2.  IMF Is No Cure-All for Hungary
Gergo Racz, WSJ Emerging Europe

Hungary surprised markets when it expressed interest in a new IMF agreement. The announcement marks a sharp U-turn from last year when the government abruptly broke off talks with the lender. Even if an agreement is reached, the post notes that the country’s fundamentals remain poor and its sovereign credit rating still teeters on the edge of ‘junk’.

EM Muser: This appears to be a ploy by the government to delay a sovereign credit rating downgrade. The fact that the government publicly expressed interest in an IMF deal before notifying its own central bank – or even the IMF itself – lends support to this idea.

Hungary wants an deal with no strings attached – that is, with no austerity measures. However, I find it hard to believe the IMF will go along without demanding some sort of structural reforms, which the country badly needs. In the meanwhile, the ploy may work, at least temporarily, as the mere prospect of a deal should help prevent borrowing costs from spiking dramatically. (See my recent posts on the country: Hungary’s Latest Debt Relief Plan: From Bad to Worse and Hungary’s Vicious Circle: Anemic Lending and Weak Growth).

3. Argentina: Balance of Payments Crunch?
Daniel Volberg, Morgan Stanley

Volberg describes the significant fall in Argentina’s international reserves, which have declined by more than $5bn since July. While he does not foresee a full-blown currency crisis, he does note several areas for concern, including the country’s deteriorating balance of payments and an acceleration in investors pulling money out of the country following the tightening of capital controls in late October.

Mr. Volberg believes the government’s currency policy could go one of two ways. The good scenario would involve a rise in interest rates to compensate investors for a weakening of the peso in an effort to keep capital from fleeing, while a bad scenario would feature a more severe tightening in capital controls along with a multiple exchange rate regime.

EM Muser: Argentina poses something of a conundrum. I discussed analysts’ widely varying perspectives on the country’s economic success last week. (See The Weekly Mishmash: November 13). On the positive side, the economy expanded by 7.7% in the year through September. However, this fast growth does not appear sustainable.

It’s increasingly clear that the administration’s policies are draining investor confidence and prompting capital to flee the country. President Cristina Fernandez Kirchner is due to announce her new cabinet in early December, which should give more insight into the government’s future policy direction.

4.  Brazil: ‘Pacification’ of Favelas Not Just a Media Circus
Fabiana Frayssinet, Inter Press Service

Last week, roughly 3000 heavily-armed soldiers and police took over Rio de Janeiro’s largest slum, Rocinha. Officials hailed it as a “recovery of territory” by the state.

The occupation is “part of a new security strategy that provides for a permanent community policing presence as well as services and projects for social improvement and infrastructure in favelas, replacing the traditional policy of head-on warfare on the drug gangs.” According to the article, Rio has some 750 favelas with 1.5 million people, about one-third of the city’s total population. The goal is to occupy 40 of them by 2014.

EM Muser: This is huge positive step forward for Brazil that hasn’t received much international attention. I lived in the country about a decade ago and still remember the power of the drug gangs. These are no common thugs. They have anti-aircraft missiles and were powerful enough to shut down Rio on a number of occasions – a pretty mean feat considering it’s a city of roughly 6 million people. In more recent years, they have managed to shoot down police helicopters.

Drug gangs effectively control large swathes of the city, and it’s encouraging to see authorities finally stepping in. In some ways, their hand has been forced. Brazil is hosting the World Cup in 2014 and the Olympics in 2016. These events represent a coming-out part of sorts for the country, and authorities can’t afford to let Brazil’s image be tainted by public security problems.

5.  Putin is booed at martial arts fight
Charles Clover, FT

The crowd unexpectedly heckled Russian President Vladimir Putin at a live televised fighting event. “Mr Putin was seeking to boost the popularity of the hegemonic United Russia party in forthcoming parliamentary elections on Dec 4, but the spectacle showed that the gulf between the regime and the people appears to be widening.”

EM Muser: This is not the first time one of Putin’s publicity stunts has gone awry. Last month, his spokesman admitted that Putin’s discovery of ancient Greek ceramic pieces on a dive in August had been staged (see here). Despite these stumbles, Putin still enjoys a 61% approval rating according to a recent poll and is expected to return to the presidency in 2012.

The Weekly Mishmash: November 2

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1. Regional Economic Prospects: October 2011

European Bank for Reconstruction and Development (EBRD)

Economic fundamentals in emerging Europe are generally better than before the onset of the crisis and the EBRD does not expect another region-wide recession. But it also believes the region now faces greater downside risks.

“[E]xternal shocks may be more severe than in 2008/09 on account of higher stress in the euro zone, including the banking systems, particularly under the downside scenario. There is a risk that the ability of bank groups to pass on support to their subsidiaries in the transition region may be constrained by their national governments. This could result in a substantial reversal of bank debt flows and a large contraction of credit in the region, with potentially severe consequences for output.”

EM Muser: Similar to my recent post (Is the CEE Better Prepared This Time Around?), the EBRD questions whether CEE countries will prove more resilient this time around and hones in on the potential for a severe disruption in cross-border banking flows.

The EBRD advises increased policy coordination along the lines of the Vienna Initiative in 2009, when Western European parent banks collectively pledged to maintain their exposure to the region’s hardest hit countries. The Vienna Initiative was a novel idea that pulled the region back from the brink of a full-fledged crisis. However, such an initiative could prove more difficult to implement this time around given the heightened stress on Western European banks stemming from the eurozone debt crisis.

2. The Past, the People and the Policies

Spyros Andreopoulos, Morgan Stanley

The author examines the forces that have shaped the thinking of today’s central bankers. He notes that the most prominent – Ben Bernanke (US), Adam Posen (UK), Athanasios Orphanides (ECB) – have spent a large amount of time studying ‘depression economics’ – eg. the Great Depression and Japan’s more recent slump. As a result, they believe in avoiding deflation at all costs and in avoiding premature tightening that could tip the economy back into recession.

Andreopoulos notes that this line of thinking comes with certain risks: “In particular, erring on the side of caution likely implies exiting too late, which in turn means elevated medium-term inflation risks. Yet, it is rational for a risk-averse central bank to prefer the lesser of two evils…”

EM Muser: Andreopoulos focuses on advanced economies, but his points are also useful in understanding recent actions of emerging market central banks. Like advanced economies, they face a delicate balancing act.

As the global backdrop darkens, EM central bankers understandably want to cushion the blow on their economies. And since monetary policy works with a lag, several (eg. Brazil, Indonesia, Israel and Turkey) decided to preemptively cut their policy rates, surprising many analysts. (See my post: Giving Turkey’s Central Bank the Benefit of the Doubt). Notably, Turkey has since backtracked and raised its lending rate on Oct 20 due to a sharp depreciation in the lira.

As with advanced economies, cutting rates is a gamble as it raises inflation risks down the line, especially for EM central banks that have fought hard to gain credibility. However, for many, this is the lesser of two evils given the threat of a new global recession.

3. China labour costs soar as wages rise 22%

Simon Rabinovitch, FT

Official data showed minimum wages in the world’s most populous country rose by an average of 22% this year. Labour costs are starting to rival those in other emerging markets, and Vietnam and Bangladesh are among the beneficiaries that are luring low-cost manufacturers and winning market share.

EM Muser: The jump in minimum wages relates to government efforts to calm social tensions and stimulate domestic consumption. However, the rise may backfire as the Economist magazine reports that some businesses, short of cash, are simply not paying their workers. (See: Unpaid wages in China: Can’t pay, won’t pay).

China will continue to offer relatively cheap labour for now, but questions are growing about how long it will last given the country’s demographics. According to UN data, China will add roughly 18 million people to its working-age population in 2011-20, which is paltry compared to the 114 million people added over the past decade.

4. Brics split on euro zone rescue

Carolyn Cohn, Reuters

Emerging markets aren’t going to be the white knights for the eurozone that many had hoped. India and Russia, in particular, are wary of investing in the European Financial Stability Facility (EFSF), although they may still extend financial support through the IMF.

EM Muser: This should not come as a surprise. First, it would be very hard for BRIC leaders to sell their populations on the need for a European bailout when their per-capita incomes are so far below the euro area average.

Second, the big emerging markets have not coordinated well on the international stage, which makes it unlikely the BRICs could successfully reach a joint agreement on a bailout plan. For example, Brazil’s finance minister Guido Mantega let slip in September that a BRIC rescue of the eurozone was a possibility. However, he had failed to consult with the other BRICs before his pronouncement.

The BRICs could exert more influence if they presented a more united front. For example, this spring, many EMs would have loved to place one of their own as head of the IMF. However, they disagreed on who. Europe and the US were better coordinated and managed to stick Christine Lagarde in the top spot. (See my related post: Why Emerging Markets Are Not in the Running for Top IMF Job)