EMERGING OR SUBMERGING
International analyst Kevin Kajiwara weighs in on the impact the global financial crisis may have on the fast-growing BRIC countries of Brazil, Russia, India and China.
In the wake of the global economic downturn, emerging markets are changing dramatically, but then again, hardly at all.
On the one hand, top emerging market countries such as Brazil, Russia, India and China (BRIC) are still poised for growth, albeit more slowly in the coming months. On the other, the BRIC countries are still firmly part of the global economic network, still susceptible to the rises and falls of the U.S. and European economies, reports Kevin Kajiwara, director, global markets, at Eurasia Group, a political risk research and consulting firm.
The economic downturn has steamrollered the market theory known as “decoupling” – which generally held that emerging market economies had grown and matured to the point that they no longer depended on the U.S. economy for growth or would suffer greatly when the U.S. economy slumped.
“Decoupling, as a concept, has pretty much been debunked,” Kajiwara says. “There was no safe harbor in emerging markets. The global financial meltdown was really a crisis of credit, liquidity and a flight for the exits.”
A look at each of these major emerging economies will help shed some light on the growth prospects and challenges for them.
CHINA, a country with 1.3 billion people and double-digit growth rates over the past 10 years, is a good place to start. The International Monetary Fund forecasts the country’s growth rate to fall to the lowest rate in a decade, to just 5 percent, from about 9 percent in 2008.
The government announced that it will try to boost its domestic spending with a $580 billion fiscal stimulus package. And this is where China’s growth story becomes interesting.
“Growth is all that matters,” Kajiwara says of China. “You can see massive internal investment in the stimulus package they put in there. They are building domestic demand and a domestic consumer economy. They are not trying to save the world’s financial system.”
Much of that stimulus package is devoted to massive infrastructure projects such as roads and transportation. China is also looking to climb the ladder in the production chain by grabbing more of the overall production process for various goods, not just making cheap goods or only part of the overall product that ultimately is assembled elsewhere.
That leads Kajiwara to ask a rather provocative question of his corporate clients that already are using Chinese manufacturing as part of their production process.
“We’re no longer asking, ‘What is your China strategy?’ but rather ‘What is your China exit strategy?’” Kajiwara says. “That’s because life can get very difficult for, say, Chicago-based Boeing in 20 or 30 years when all of a sudden China decides it wants its own national aircraft manufacturer.”
China’s growth and ongoing push to invest within the country have long made it a key player in virtually every major commodity and financial asset class. The country stands as the largest holder of U.S. Treasuries and is a major consumer of grains, metals and energy. Kajiwara says China has built stockpiles in more than 200 different commodities.
In U.S. Treasuries, he says there is little chance that China will pull out of the market in any substantial way, a move that could undercut its own position in the market.
“If they were to start dumping Treasuries, no one would get hurt more than China,” Kajiwara says.
BRAZIL another country that showed it too is not immune to the global credit crisis. The country shone in recent years with solid gross domestic product (GDP) growth in the 4-4.5 percent range, and the government insists 4 percent growth in 2009 is still achievable. Meanwhile, inflation has remained in check, estimated around 6 percent. And that has been the recipe for success in Brazil, a country that has been hit hard historically by hyperinflation but has demonstrated several years of steady fiscal and monetary policy under two different administrations.
Brazilian President Luiz Inácio Lula da Silva has shepherded a pragmatic economic policy agenda.
“Lula wants to name his successor and have a smooth transition in 2010,” Kajiwara explains. “That is dependent on controlling inflation. Inflation is the key to the Brazilian economy and its success.”
Like China, Brazil is another BRIC country that will continue to be a major participant in the global commodities picture, as a producer rather than consumer. Brazil is rich with natural resources, such as corn and soybeans, sugar and more recently oil.
“Long-term, we see Brazil as the Saudi Arabia of alternative energy,” Kajiwara says.
Brazil has used its sugar production to become the largest producer of sugarcane-based ethanol in the world. Much of the demand for ethanol comes from Brazil itself, but Kajiwara says Brazil could expand sugar exports to the United States when tariffs on Brazilian sugar are to be phased out as expected.
RUSSIA still remains somewhat of an enigma. Its military push into Georgia last year raised concerns about its aggressiveness and long-term geopolitical intentions. That move also punished the Russian stock market and the global economic downturn further hurt the capital markets there. Then came the natural gas pipeline dispute with Ukraine, which further damaged its credibility in Europe.
One key focus for analysts has been the Russian central bank’s monetary strategy for the ruble. After spending roughly 25 percent of its reserves on supporting the currency, it then allowed nine incremental devaluations of the ruble in the final four weeks of 2008. That currency fell to its lowest level against the U.S. dollar since 2005, which also reflected the downturn in the price of crude oil, a major driver in the Russian economy in early 2009.
As such, he is also keeping a close eye on how Russia uses its strong position in the energy market.
“The energy issue is a concern,” Kajiwara says. “You would think that when you are no longer selling oil at $147.00 a barrel and at less than $40.00 a barrel, that would cause you to act more cautiously and prudently, in line with international norms. Instead, they’ve taken a more hard-line approach. We’d define Russia over the past year as ‘petro-arrogant.’”
INDIA shares some of the same components as China, with its massive population and growing middle class. Forecasts put India’s GDP growth at 6 percent in 2009, which will be supported by a $4 billion stimulus package. Like China, India’s government is trying to stimulate domestic growth with its package.
The interesting distinction about India as it compares to China is how the two governments are participating in their economic growth.
“China grows because of its political leadership and India grows in spite of its political leadership,” Kajiwara observes. “This is a testament to India’s entrepreneurs, who work around the political bureaucracy and gridlock.”
But India has faced two major issues, with the terrorist attacks in November and the accounting fraud at one of its top outsourcing companies, Satyam, in early January.
Both events come as the country faces national elections in April, and the possibility that India’s government could get bogged down in addressing neighboring Pakistan and the growth of Islamic extremism from the region.
“Our concern is that the focus of Islamic violence has been moving eastward,” Kajiwara says. “How India reacts to Pakistan could exacerbate the domestic situation in Pakistan and therefore increase the risks regionally.”
Yet, when the dust clears on the global economic slump, Kajiwara says the BRIC countries, while vastly different in many ways, will be well positioned to return to the strong growth they exhibited before.
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