BRICS’ Reinforced Rheumy Repercussions
The World Bank’s Global Economic Prospects report blamed emerging economy weakness for paring the 2016 growth forecast to below 3 percent, as it examined BRICS spillover effects by region with their slowdown “sneeze” often resulting in neighbor “colds” as in Russia-Central Europe and China-East Asia. In 2015 the 4 percent GDP advance was half the level of 2010, with “steep recessions” in Brazil and Russia. Country-specific rather than external shocks were the main cause since 2014, and long-term structural drags are prominent. From 2010-14 they contributed 40 percent of global and two-thirds of emerging market output, and dominate trade, commodity and financial markets. Banking and portfolio flows, remittances and FDI take the overwhelming portion, and correlation has increased through these channels. Brazil has influenced Latin America, South Africa the Sub-Sahara and India low-income South Asia. BRICS’ fall has hurt developing 0.8 percent and frontier destinations 1.5 percent respectively. Higher risk spreads and funding costs have permeated the asset class and fiscal, monetary and structural policies are struggling to rebuild confidence, according to the update. Productivity and technology ability has slumped, and fallout is obvious elsewhere including in Egypt, Korea, Mexico, Nigeria and Turkey.
Emerging market equity funds were off $70 billion in 2015 as measured by EPFR, with Brazil (-$1 billion), China (-$18 billion), India (+$10 billion) and Russia (+$200 million), and with BRICs altogether at -$1.5 billion. Frontier markets lost $2 billion and Africa $400 million. Hard and local currency bonds each declined over $12 billion, and on the EMBI index Brazil and South Africa were down while Russia gained double-digits but has sputtered early into 2016. With lower oil prices the budget will be cut another 10 percent as interest rates remain on hold and recession continues. Inflation will dip under 10 percent, and the ruble will further decline from 2015’s 25 percent dollar slip. Banks are under pressure as state-owned VEB seeks $20 billion in additional capitalization and 100 small institutions have been shut. The PMI is at 50 and sanctions against the EU and Turkey will hamper cross-border trade. A London court battle has started with Ukraine over repayment of $3 billion in debt, with former Finance Minister Kudrin under consideration for return. Leading lender Sberbank is scrambling to handle consumer and real estate exposure as European supervisors demand increased support for its Austrian subsidiary.
The India mood is also more cautious despite prediction of repeated 7 percent growth as parliament adjourned without passage of national sales tax and economic statistics including inflation came under investor question. International asset managers, the latest Goldman Sachs with $1 billion under control, have ended operations with stiff competition as regulators often switch rules on distribution and transparency creating confusion. Franklin Templeton with a longstanding presence has the biggest industry share at 5 percent, just behind once-dominant UTI which has partnered with T. Rowe Price. Local government bonds have diverted share inflows with an expanded overseas ownership ceiling as infrastructure projects have hesitated to launch despite official approval. Prime Minister Modi after state election setbacks has invited Congress Party head Gandhi for belated talks as the two try to drain personal and political animosity.
