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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Green

In Argentina, A Visit To World's Highest Solar Energy Park

With loans and solar panels from China, the massive solar park has been opened a year and is already powering the surrounding areas. Now the Chinese supplier is pushing for an expansion.

960,000 solar panels have been installed at the Cauchari park

Silvia Naishtat

CAUCHARI — Driving across the border with Chile into the northwest Argentine department of Susques, you may spot what looks like a black mass in the distance. Arriving at a 4,000-meter altitude in the municipality of Cauchari, what comes into view instead is an assembly of 960,000 solar panels. It is the world's highest photovoltaic (PV) park, which is also the second biggest solar energy facility in Latin America, after Mexico's Aguascalientes plant.

Spread over 800 hectares in an arid landscape, the Cauchari park has been operating for a year, and has so far turned sunshine into 315 megawatts of electricity, enough to power the local provincial capital of Jujuy through the national grid.


It has also generated some $50 million for the province, which Governor Gerardo Morales has allocated to building 239 schools.

Abundant sunshine, low temperatures

The physicist Martín Albornoz says Cauchari, which means "link to the sun," is exposed to the best solar radiation anywhere. The area has 260 days of sunshine, with no smog and relatively low temperatures, which helps keep the panels in optimal conditions.

Its construction began with a loan of more than $331 million from China's Eximbank, which allowed the purchase of panels made in Shanghai. They arrived in Buenos Aires in 2,500 containers and were later trucked a considerable distance to the site in Cauchari . This was a titanic project that required 1,200 builders and 10-ton cranes, but will save some 780,000 tons of CO2 emissions a year.

It is now run by 60 technicians. Its panels, with a 25-year guarantee, follow the sun's path and are cleaned twice a year. The plant is expected to have a service life of 40 years. Its choice of location was based on power lines traced in the 1990s to export power to Chile, now fed by the park.

Chinese engineers working in an office at the Cauchari park

Xinhua/ZUMA

Chinese want to expand

The plant belongs to the public-sector firm Jemse (Jujuy Energía y Minería), created in 2011 by the province's then governor Eduardo Fellner. Jemse's president, Felipe Albornoz, says that once Chinese credits are repaid in 20 years, Cauchari will earn the province $600 million.

The Argentine Energy ministry must now decide on the park's proposed expansion. The Chinese would pay in $200 million, which will help install 400,000 additional panels and generate enough power for the entire province of Jujuy.

The park's CEO, Guillermo Hoerth, observes that state policies are key to turning Jujuy into a green province. "We must change the production model. The world is rapidly cutting fossil fuel emissions. This is a great opportunity," Hoerth says.

The province's energy chief, Mario Pizarro, says in turn that Susques and three other provincial districts are already self-sufficient with clean energy, and three other districts would soon follow.

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