The BRICS Summit’s Tentative Troughs
The annual leading emerging economy BRICS gathering in Johannesburg, 15 years after the term was coined in global investment bank research, failed to lift the collective financial market mood after the category was down 5% on the MSCI Index through mid-year. Russia, India, Brazil and South Africa joined China in condemning trade protectionism as the Beijing-Washington tariff and currency slugfest ratcheted up, with the International Monetary Fund as a summit participant also warning of “mounting world growth threats.” to asset values. In the well-known Bank of America fund manager survey 60% of respondents cited trade and investment retaliation as the top tail risk, repeating the anxiety level from the onset of the European debt crisis five years ago.
The Washington-based Institute for International Finance at the same time pointed the finger at BRICS China, Brazil and South Africa for rapid government and corporate debt increases contributing to the $25 trillion, 320% of output, global total in the first quarter. India and Russia escaped criticism, and their stock markets were the best performers, near positive toward the end of July. The cohort agreed to cooperate on industrial policies and further target infrastructure projects through the joint New Development Bank, as the Asian Development Bank separately published its 2030 strategy promoting common financial services rules and platforms. Unlike previous declarations and actions, such as when the group created a contingency fund for balance of payments support or Beijing’s Asian International Infrastructure Bank explicitly agreed to work with the NDB and ADB, the Johannesburg outcome did not sway markets. As illustrated by the reactive protectionism statement, they remain uncomfortably on the defensive into the third quarter amid souring fundamentals and sentiment.
China, Brazil and South African stocks are down double-digits as respective region heavyweights on the MSCI benchmark, and China’s “A” class momentum in particular has reversed since June inclusion. Second quarter gross domestic product rose 6.7%, but industrial slowdown was clear in the latest monthly figures as the IMF slightly lowered this year’s forecast. The Yuan in turn shifted course against the dollar, but depreciation was less than the 7% first half emerging economy average. Chinese officials called the fluctuation range “reasonable” as they acknowledged “binary volatility,” with international reserves still over $3 trillion despite foreign direct and portfolio investment pullbacks. The securities regulator announced “A’ share opening to individual investors and launch of a direct Shanghai-London link in 2019. Although The Economist’s “Big Mac” Index calculates Yuan undervaluation still at 40%, analysts argue that deliberate weakening would further discourage FDI and raise the cost of $775 billion in offshore corporate dollar bonds, according to Nomura Securities data.
Corporate defaults continued with Wintime Energy the largest this year at $10 billion across a dozen instruments, as Moody’s Ratings commented that new money was difficult to access with “cycle change.” The National Development and Reform Commission has already limited property firm overseas debt issuance, with $250 billion in total repayment due next year. Local governments are also leveraged and face heavy rollovers in the coming month. The central bank again injected liquidity into the banking system to sustain lines to problem customers, even as stricter classification criteria will downgrade “special” to bad loans.
India is in the Trump Administration’s sights both for import and currency intervention practices, but shares rebounded in recent weeks on good high-tech bellwether and private bank earnings. The latter gained favor as the government injects more capital into state-owned giants following poor management and corruption revelations. Prime Minister Narendra Modi and the ruling BJP Party are in re-election mode, as key economic indicators outside 7% headline growth falter. The trade deficit and inflation are at 5-year highs, and a bid to win farmer votes with heftier subsidies will likely swell the fiscal deficit. Other BRICS Brazil and South Africa are also struggling with runaway budgets and political transition while dealing with resurgent inflation. Brazil’s October presidential election could bring an anti-establishment team into power as the public pension system imperils debt sustainability, and South Africa’s contest next year will be a verdict on President Cyril Ramaphosa’s business-friendly policies to attract over $100 billion in new foreign investment. These leaders face steep climbs, with the Johannesburg summit’s meager results highlighting the lack of parallel market traction.
