Economy

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.

Has India's economic miracle come and gone? (Jasleen Kaur)
Has India's economic miracle come and gone? (Jasleen Kaur)
Frank Stocker

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.

Recently, however, there have been more and more signs indicating that the situation in Brazil, Russia, India and China is about to go downhill.

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

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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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