BRICS - still stable or dismantling?

What is BRICS


In the beginning, there was only BRIC, which later became BRICS. It's an acronym for the developing nations of Brazil, Russia, India, and China. As of 2010, South Africa joined the group, which is now referred to as BRICS. These countries are believed to be the future dominant suppliers of manufactured goods, services, and raw materials by 2050. China and India will become the world's dominant suppliers of manufactured products and services, while Brazil and Russia will become similarly dominant as suppliers of raw materials.

An analyst at Goldman Sachs gave the name referring to emerging powers that would be the five largest economies of the world in the 21st century, alongside the U.S. Starting 2009; the nations appropriated the term and started a political dialogue, which emerged into annual meetings of heads of state and government.

BRICS created the New Development Bank (NDB) in 2014, an institution that meant to compete with the U.S. and Europe dominated the International Monetary Fund and World Bank. NDB is said to have a subscribed capital of $50 Billion, of which $10 Billion is paid capital. It has become one of the largest multilateral development banks in the world.

The countries currently represent about 30% of the world's landmass and 42% of its population, and 23% of global GDP, the group's official website says.


What’s the credo of BRICS?



BRICS countries say they want "fairer international governance" in a multilateral system that they see as being dominated by the Euro-American unions.

In a column published on November 13, 2019, at the 11th annual BRICS summit, Russian Foreign Minister Sergei Lavrov also detailed some of the values and policies that bind the group together.

"BRICS is becoming a magnet for many emerging economies. They are looking at us because the group protects values of multilateralism, supports a transparent, non-discriminatory, open, free and inclusive international trade, and rejects unilateral economic restrictions and protectionist measures in developing international economic ties," Lavrov wrote.


The relevance of BRICS


Jim O’Neil from Goldman Sachs stated in his 2001 thesis that these countries could have power as an economic bloc. The growth that everyone was talking about was expected due to lower labor and production costs in these countries.

Like any other group, different opinions emerged over time. In a note published by S&P Global Ratings, it was stated that the group "may no longer make sense. […] The diverging long-term economic trajectory of the five countries weakens the analytical value of viewing the BRICS as a coherent economic group."

China and India’s economic performance have been increasing for the last two decades, whereas Brazil, Russia, and South Africa didn't meet the expectations.

Over the years, political fractions were seen. During Bolsonaro's election campaign, he has accused China of "buying Brazil" and has threatened to torpedo bilateral ties.

The New Development Bank has also been on focus. In essence, some member countries criticized the institution for taking too long to deliver loans to help boost economies amid slowing global growth, creating impatience.


Brazil



The economic situation in Brazil is not so different from a decade ago. The most significant progress made in economic and social areas was between 2003 and 2014 when more than 29 million people left poverty and inequality declined. The level of poor people is at 4.4%. But since 2015, the pace of poverty and inequality reduction seems to have stopped.

The country’s growth rate has been slowing since the beginning of the decade, from an annual growth rate of 4.5% to 2.1%.

Restoring fiscal sustainability is the most pressing economic challenge for Brazil. To address the dynamics of unsustainable debt, the government has enacted Constitutional Amendment 95/2016, which limits the rise of public spending. This amendment imposes a fiscal adjustment of 4.1% of GDP through 2026 and stabilizes the debt at about 81.7% of GDP in 2023.


Russia


After several years of negative growth due to massive capital flight, the collapse of the Rouble, falling Oil prices and trade sanctions imposed by the West after the Ukrainian crisis, the Russian economy has returned to modest growth since 2017, due to mineral resource extraction and private consumption.

Since the 1998 financial crisis, the banking sector has not undergone complete restructuring. The service sector employs more than two-thirds of the population and generates 54.1% of the GDP. According to the IMF, GDP is at +1.2%, and it has a prospect of growing up to 2% in 2021.

Industry accounts for 32.1% of Russia's GDP and employs 27% of the workforce. The country inherited most of the industrial bases of the Soviet Union. The most developed sectors are chemistry, metallurgy, mechanics, construction, and defense.

The Russian economy continued to grow modestly in 2019. Still, industrial activity slowed down due to weaker external demand, lower Oil production, in line with quotas agreed with OPEC and Oil-exporting countries.


India


In recent years, the country has made a significant dent in poverty levels, with extreme poverty dropping from 46% to an estimated 13.4% over the two decades before 2015. Between 2011 and 2015, more than 90 million people escaped extreme poverty and improved their living standards thanks to robust economic growth. However, India’s growth rate has decelerated in the past two years.

Economic liberalization measures, including industrial deregulation, privatization of state-owned companies, and reduced controls on foreign trade and investment, began in the early 1990s and served to accelerate the country's growth, which averaged nearly 7% per year from 1997 to 2017.

As the world's third-largest economy in purchasing parity terms, India aspires to better the lives of all its citizens and become an upper-middle-income country by 2030.

India's labor force is expected to touch 160-170 million by 2020, based on the rate of population growth, increased labor force participation, and higher education enrollment. India's nominal GDP growth rate was estimated at 12% in 2019-2020.


China


Today, China is an upper-middle-income country and the world's second-largest economy. But its per capita income is still only about a quarter of that of high-income countries, and about 373 million Chinese are living below the upper-middle-income poverty line of $5.50 a day. China also lags in labor productivity and human capital. Income inequality has improved over the last decade, but it remains relatively high.

Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than 850 million people lifted out of poverty. Around 43 million people continue to live on less than USD 1 per day, which is the poverty line set by the government (according to official statistics, five years ago, about 100 million people lived below that line).

China is the world leader in the production of certain areas (tin, iron, Gold phosphates, zinc, and titanium) and has significant petrol and Natural Gas reserves, making the country the fifth-biggest Oil producer in the world, with 3.8 million barrels a year. The industry sector contributes to approximately 40.6% of China's GDP and employs 28.2% of the population.

China had one of the fastest-growing GDPs in the world in 2019. The economic growth slowed slightly, reaching 6.1%. That trend is likely to continue in 2020 and 2021 when the GDP is expected to grow by 5.8% and 5.9%.


South Africa


South Africa has made considerable strides toward improving the wellbeing of its citizens since its transition to democracy in the mid-1990s, but progress is slowing. Based on the international poverty line of $1.90 per day, 18.8% of South Africans were poor in 2015, following a decline from 33.8% in 1996. Unemployment remains a crucial challenge, standing at 27.6% in the first quarter of 2019. The unemployment rate is even higher among youths, at around 55.2%.

The South African economy grew by 1.3% in 2017 and 0.8% in 2018. The World Bank projects a growth up to 1.7% in 2020.

South Africa is rich in mineral resources. The country is the world's largest producer and exporter of Gold, Platinum, chrome, and manganese, the second-largest Palladium producer and the fourth-largest producer of diamonds - with mining rents accounting for around 2.4% of GDP.


Coronavirus influence over BRICS economy


China welcomed the support extended by the BRICS countries in its efforts to combat the deadly Coronavirus epidemic that has brought the country to a virtual standstill, describing it as an epitome of the support Beijing has received from the international community.

Russia, the current chairman of the BRICS (Brazil, Russia, India, China, and South Africa), issued a statement extending support of the BRICS group to the firm commitment and decisive efforts of the Chinese government to combat the Coronavirus.


"The BRICS countries commit to work together in a spirit of responsibility, solidarity, and cooperation to bring this outbreak under control as fast as possible. They underline the importance of avoiding discrimination, stigma, and overreaction while responding to the outbreak," it said.

The NDB said in a cautious statement appreciated China’s ‘great efforts and effective measures’ aimed at curbing the spread of the novel Coronavirus.

“We are confident in China’s epidemic prevention and control ability as well as measures taken by the Chinese Government so far to prevent the spread of infection, including the allocation of more than RMB 71 billion in funds ($10 billion) to contain the Coronavirus,” said the bank.

How the Coronavirus pandemic influenced the markets of BRICS members


In Brazil, the benchmark Bovespa index fell more than 38.5% since the beginning of the year. The index is on course for its biggest fall since August 1998. The currency dropped to 5.1023 per Dollar, as seen on Bloomberg.com.

The Russian economy has been rocked by the Coronavirus outbreak, and the breakdown of the OPEC+ Oil production pact between Russia and Saudi Arabia. The turmoil has shocked traders around the world and resulted in sharp volatility on the Russian stock markets and swings in the value of the Rouble— both of which are down around 20% since the start of the year. This is around the levels last seen in the 2016 financial crisis and on par with the Ruble’s weakest level against the Dollar since it was redenominated in the wake of the 1998 financial crisis in Russia.

In India, the major index India50fell since the beginning of the year more than 30%. Nifty has been in a secular downtrend, as investors are fleeing equities in droves amid a rise in the number of Coronavirus cases, threatening a collapse of many businesses. It closed at a low of 8,263, falling 33.47% from its high of 12,430 recorded in January.


Things don’t look good either in the country that was the first victim of the Coronavirus. HongKong45 dropped more than 900 points four times this year. It last traded so low in January 2017. The decline comes as some economists say the world is falling into recession, including the U.S., because of the upheaval caused by the Coronavirus.

South Africa’s Rand fell to a more than four year low, stocks sunk back to 2013 levels, as a wave of stimulus from governments around the world failed to ease the panic about the Coronavirus pandemic.


Relationships and International overview


"The much-hyped rise of the BRICS has lately been met with equally fervent declarations of their demise," Senior Lecturer in International Political Economy Kristen Hopewell noted in a 2017 publication. "Contrary to the widespread assumption that these countries are too diverse to ally, (...) the emerging powers displayed a remarkable degree of unity and cooperation, working in close concert to successfully challenge the dominance of the US and other established powers," the researcher wrote.

Their membership acted as a catalyst for more positive positioning in the global marketplace amongst global investors and strategic investment partners, created new business opportunities for the private sector to grow and thrive, generated large scale sources of new and much needed jobs, and ultimately supported rapid economic growth.

For example, since South Africa became member, it had a growth of 29% in exporting.

The mining sector is being exploited by every member, each having companies in another member country.

The BRICS countries have registered good economic growth, but they are facing a significant increase in non-communicable diseases as well as rising health inequality. India, along with China, is a pioneer in manufacturing low-cost medicines and vaccines. Both countries have been playing a constructive role in making medicines accessible to the developing countries around the world.


Even though there is a lack of uniform approach towards food security and countering health-related risks, these emerging economies have made progress in poverty alleviation and have made significant contributions to the global health sector.

Russia and its BRICS peers have been looking for ways to decrease their dependence on the U.S. Dollar and have advocated using their national currencies in mutual trade.

Such examples of economic cooperation and joint business partnerships between member countries are proof of the potential that this group has.


Sources: ibef.org, euronews.com, investopedia.com, worldbank.org, cia.gov, nordeatrade.com, techfinancials.co.za, themoscowtimes.com, reuters.com

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The information presented herein is prepared by CAPEX.com and does not intend to constitute Investment Advice. The information herein is provided as a general marketing communication for information purposes only and as such it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.

Therefore, Key Way Investments Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance is not a reliable indicator of future results.