The BRICS’ Wobbly Wall Wreckage

The BRICS club with new entrant South Africa headed into the first half close with declining GDP growth, fund flow and stock market numbers as the Eurozone and other external events combined with lingering domestic damage previously downplayed by global investors. Chinese equities are up slightly but low valuations, an increase in FII quotas, and reserve requirement cuts have not changed sentiment hinging on currency drift and output reduction to the 8 percent range. Bank lending is flat on softer exports and housing auto and steel demand and fiscal stimulus has shifted from open-ended infrastructure projects to targeted consumer energy-related focus and may embrace long-delayed tax reforms. Fixed-asset outlays are off the traditional torrid pace as the central government tries to sort out burden-sharing with indebted localities and decision-making is postponed until the scheduled October leadership reshuffle. In financial services negotiators agreed in the US Strategic and Economic Dialogue to 49 percent local broker and investment bank ownership as state giant ICBC soon after got Federal Reserve permission for a California acquisition. Institutions are following customers in the “go out” natural resource policy and for their own account to fill the trade credit gap left by European escape and offset anemic deposit growth at home diverted to wealth management products. They are looking across the strait with the re-election of Taiwanese President Ma who promised during the campaign to expand a commercial cooperation accord. Both sides are considering turning Pingan Island into a duty-free zone, but the President has been sidetracked by disputes within his party on beef imports, capital gains tax and power price rises.

Brazilian shares went negative early and are down almost 10 percent in dollar terms as the real fell to 2 per dollar as China’s commodity appetite wanes and the consumer comes under pressure from rising debt as the central bank has slashed the benchmark rate to 9 percent with hallowed guaranteed savings accounts likewise subject to diminished returns. This year’s GDP leap may not even match 2011’s 2.7 percent and inflation expectations toward 5 percent are at the upper bound of the target on likely currency pass-through. Banks have been hammered by higher NPLs at 8 percent of the total, and state pressure to narrow margins and maintain lines to strategic industries in the run-up to the World Cup and Olympics extravaganzas. Loyalists to President Dilma have been placed at the helm of Petrobras and Vale, and Chevron executives under civil and criminal investigation for an oil spill have been ordered to surrender their passports as Workers Party members sympathetic to Argentina’s takeover call for greater official control. In Russia capital flight continues at $10 billion/month and in India exporters have been ordered to transfer proceeds as the rupee tumbles beneath 55/dollar after a ratings downgrade. South African rand depreciation has also been steep in its role as a liquid asset class proxy and sub-par growth in a class by itself at half the continent average.