Four BRICs and a Great Wall

In Photo: From left, Russian President Vladimir Putin, India’s PM Narendra Modi, Brazilian President Dilma Rousseff, China’s President Xi Jinping and South Africa’s Jacob Zuma gesture during the 6th BRICS Summit in Fortaleza, Brazil, on July 15, 2014.

EMERGING markets have been through a great deal in the past four years. The “taper tantrum” in 2013, prompted by fears of a change in American monetary policy, was followed by the oil-price drop of 2014, China’s botched devaluation of its currency in 2015 and India’s botched “demonetization” of much of its own currency in late 2016, in which it abruptly removed high-value banknotes from circulation.

This year has started more brightly, however. Indeed, for the first time in two-and-a-half years, the world’s four biggest emerging economies—Brazil, Russia, India and China, known as the BRICs—are all growing at the same time.

Russia’s GDP bottomed out at the end of 2015, using seasonally adjusted figures, after the longest recession since the 1990s. It has expanded at a gathering pace for the past three quarters. Higher oil prices have helped, though Russia cannot profit fully from the improved market by ramping up sales without violating the production limits that caused the market’s recovery.

During the collapse of the ruble in late 2014 and early 2015, it was easy to forget some of Russia’s economic strengths, such as its consistent trade surpluses and its substantial foreign-exchange reserves, which never fell below $300 billion. As Russia has regained its footing, the ruble has rebounded, gaining 15% against the dollar during the past 12 months, making it one of the world’s best-performing currencies.

Brazil’s torment has been even more prolonged. Its economy contracted for eight consecutive quarters as commodity prices tumbled, a president was impeached and a corrupt political class was impugned.

Brazil’s political scandals remain far from resolved, but at least the weather has improved. Generous summer rains in states such as Bahia contributed to a bumper harvest of soybeans and wheat in the early months of the year. That helped Brazil’s GDP expand by 1% in the first quarter, an annualized pace of better than 4%. Many forecasters believe that growth will be positive for 2017 as a whole.

If inflation has been too high in recent years in Brazil, it has been too low in China. Thanks to downward pressure on prices and the currency, China’s economy actually shrank in dollar terms in 2016, for the first time in 22 years. The deflationary threat has receded, however, and this year the yuan has strengthened against the greenback as capital outflows have been tamed. Indeed China’s central bank may have resumed adding to its foreign-exchange reserves, which increased by $24 billion in May, having declined by about $1 trillion since their 2014 peak as capital fled.

Will the resumption of growth in Brazil and Russia, and the return of “dollar growth” in China, breathe new life into the BRICs brand? The term was coined by Jim O’Neill, then chief economist at Goldman Sachs, and took on a life of its own. The countries’ leaders began holding an annual summit, and invited South Africa to join as an additional member. They also set up a development bank, with its headquarters in Shanghai but headed by an Indian, which now has operations in all five countries, having approved its first loan to Brazil in April.

O’Neill always has felt that South Africa, a country of only 56 million people with a GDP of less than $300 billion, was too small to stand alongside his original quartet. So far this year, indeed, the fifth member’s fortunes have diverged from those of the others, with South Africa’s economy slipping into a recession in the first quarter.

Having christened the BRICs in 2001, Goldman Sachs later sketched out their futures for the next five decades in a paper entitled “Dreaming with BRICs,” published in 2003. The investment bank then upgraded those growth projections in 2011 in light of the BRICs’ strong performance during the previous decade. That proved to be a mistake: Of the four economies, only China’s dollar GDP has kept pace with those optimistic 2011 projections, and the others have fallen short of them by a combined $3 trillion.

A similar disappointment befell stock-market investors. The BRIC equity index compiled by MSCI has lost 40% since its 2007 peak. In October 2015 Goldman Sachs folded one of its BRIC equity funds, meant for American investors, into a broader emerging-market product—“a more holistic solution in emerging-markets equity,” in its words.

These setbacks seemed to vindicate the curmudgeonly sneer cited by Peter Tasker, of Arcus Investment, dismissing the BRICs as a “Bloody Ridiculous Investment Concept.”

If the BRICs have not sustained the euphoria of 2011, however, they have amply fulfilled the original “dream,” as articulated by O’Neill in 2001 and quantified by his team two years later. Even after their recent tribulations, their combined GDP of $16.6 trillion remains far greater than the $11.6 trillion envisaged by the Goldman team back in 2003. Only Russia has failed to live up to those early expectations. China has easily surpassed them. In Brazil growth was slower than Goldman Sachs had projected, but the country’s real exchange rate appreciated further than they imagined, boosting its GDP in dollar terms.

Moreover, at some point after 2015, the BRICs became unmodish enough to count once again as good investments. Since Goldman Sachs closed its fund, the BRIC stock-market index has gained almost 20%.

© 2017 Economist Newspaper Ltd., London (June 10). All rights reserved. Reprinted with permission.

Image credits: Nelson Almeida/Agence France-Presse/Getty Images

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