When The Fairy Tale Made Of BRICS Came Crashing Down
Brazil, China, India and Russia were once the flavor of the month for investors, but this may be coming to an end as high inflation rates and slowing growth weigh on the respective national economies -- and the world's too.
BERLIN – Since the euro crisis started weighing on the German economy, developing countries have been a ray of hope for businesses and investors, with exports to BRIC countries consistently increasing in the last few years.
In case you missed the telltale signs, ratings agency Standard & Poor's (S&P) issued a warning this week that India's investment rating risked being downgraded. If this happens, it would be the first time in many years that a large developing country had such serious and pessimistic economic news.
Until now, BRIC countries have only known one direction on the list of credit-worthy nations – and that was up. If India's rating is lowered, its bonds become junk again, as they were decades ago before it joined the ranks of boom countries.
Many investors would sell as a result. Right after the S&P announcement on Monday, the rupee went south, crashing the Bombay stock market. And yet the S&P move was thoroughly justified.
India presently appears to be doing everything it can to compromise the successes of these past years. "The country is mothballing its plans to open up and liberalize its markets and instead the government is taking protectionist measures," explains Erik Nielsen, head economist at Unicredit. India's system, corroded by bureaucracy and inefficiency, urgently needs structural change – but this is getting pushed onto the back burner.
A plan to open part of the retail sector to foreign companies recently failed to make it through parliament. Instead, the government is threatening to implement retroactive taxes on mergers of foreign companies with Indian assets, going back 50 years.
Although many are hoping the proposed measure will be scrapped, the move nevertheless managed to confuse foreign investors completely -- and they are beginning to flee in droves. As a result the rupee has fallen to the dollar, and the rate of economic growth is at a nine-year low.
Parallel to this, inflation rates are rising, and as if that weren't enough, India also has the highest government debt by comparison to the other large developing countries.
BRICs crumbling one by one
But negative developments are piling up in other BRIC countries as well. Alarm bells are ringing for China, even with recent news of stronger than expected exports. This news was dampened by the fact that that both industrial production and retail turnover were well behind expectations.
This completely contradicts the government target for domestic consumption to slowly but surely take the leading role in driving growth away from exports and structural investment.
In Russia, it's the same picture. "This country really worries me, because the dependence on state-controlled commodities continues to increase," says Unicredit economist Nielsen. That too is exactly the opposite of Moscow's target.
And things aren't looking any better for Brazil. "The Brazilian government is becoming more and more interventionist and doing very little to solve the country's structural problems including high taxes and not enough investments in infrastructure and education," says Maarten Jan Bakkum, an expert on developing countries at ING Investment Management. "Instead, it's subsidizing credits to stimulate investment."
Brazil's national bank is also lowering interest rates – a toxic move in the face of the present inflation rate.
So the BRIC fairytale may soon be facing an abrupt and not so happy end. "We don't have any developing country investments left in our portfolios," says Alfred Roelli, head investment strategist at Pictet, the Swiss private bank.
In late April he sold the last positions – some Chinese stocks – and says he's only staying with China via foreign companies that have particularly high turnovers there: brands like Dior, LVMH, Nike and Swatch remain highly sought after in Asia, with or without structural reforms.
Read the article in German in Die Welt.
Photo - Jasleen Kaur