Developed countries resting on shaky BRICS

April 3, 2016
Editor(s): Heath Gilham
Writer(s): Quoc Anh Nguyen, Max Yang, Kevin Kingsley, Daniel Pederick

For the first decade of the 21st century BRICS’ (Brazil, Russia, India, China and South Africa) future seemed concrete. BRICS, along with other developing nations, was on the forefront of economic growth but have been crumbling as all members of the group are currently facing slowdowns to varying degree. With 46% of the world population and about 20% of world GDP, BRICS members partly influence through their potential. These emerging economies were grouped together not because they all aim to advance a singular goal. They were, instead, supposed to represent a possible future where power shifted away from “the West” and the living standard of much of humanity is raised to higher levels.

BRICS members are struggling after solid growth in previous years. Brazil and Russia are in deep recession, and both are under governments that do not seem capable of reversing the trend in the near future. China is accompanied by fear of a demographic grind that will make it the first country to grow old before it grows rich. South Africa’s economy woes go along with chaos in the top political level: last year its finance ministers changed twice in a week, triggering fears for investors. India, though perhaps the best of the lot, is struggling to implement long-awaited economic reforms for industrialisation.

Current situation

Looking at the current market, we can see that Brazil’s current S&P credit rating has gone down to BB from BB+, putting this mighty economy which is a huge contributor to the BRICS uprising in the early 2000’s to the ‘junk territory’ according to Bloomberg Business. The main reasons behind this decline was due to a crash in commodities such as oil, iron ore and soybeans. The slowdown in China’s markets, who is Brazil’s ‘biggest trading partner’, also contributed to the countries continuous decline.

Russia is already in recession with the falling oil prices last year costing the country an estimated $2 billion in revenue for every dollar fall in oil prices. Back in mid-2014, a barrel of oil was a constant $110, but after the fall, a barrel was sold below $48 a barrel. Doing the maths, we can see that it is no surprise that Russia is suffering at the moment. Current economists predict that if oil prices do not recover, the economy would likely shrink by 2.5 to 3.5 percent by the end of the year.

India is the only country that from the component of BRICS not imploding. With a strong performance in the last quarter resulting in 7.7% growth easily surpassing China, India is predicted to become one of the fastest-growing major economies in the world over the next several years. That being said, the country has a long way to go with “170 million individuals living on less than $1.90 per day” according to the World Bank.
Impact on the world

The slowdown in the BRICS economies has also impacted upon the rest of the world. China accounts for approximately 15% of the world economic growth. As such, a slowdown in China’s economy has affected the economies of commodity exporters such as Australia (of whom China accounts for almost one third of all exports) due to a decrease in demand from China. This led to a fall in commodity prices which is quite noticeable, as it has evidently caused stock prices to drop in countries with a large proportion of commodity stocks.

Another major impact of this slowdown in growth is the effect it has had on other emerging-market currencies. This collapse has had a significant detrimental effect on the currencies of countries such as Turkey. A general decrease in global confidence could be attributed to this, and more specifically a decrease in the confidence of the sustainability of emerging markets. According to the World Bank, if growth falls 1% below the predictions for BRICS economies, this could lead to 0.8% growth in emerging economies, as well as decreases in pre-emerging economies.

Future

Having lost significant growth potential with only a projected 4% annual growth rate, the future of the BRICS countries’ economic output seems uncertain. This slowdown in growth may be attributed to high growth not being sustainable in the long run. The future utility of the BRICS countries as a group will be dependent on their ability to face modern challenges in both a financial and non-financial context.

In order for BRICS to remain prevalent in the global macro economy, political initiatives such as the New Development Bank should be further developed. This initiative, recently launched in July 2015, aims to provide funding to mobilise resources and infrastructure for other emerging nations. Despite poor economic performance, the impact of BRICS on other developing economies would ensure their success in the future. Furthermore, the potential for new members such as Argentina, Mexico and Indonesia may also enhance their political and cultural impact in the future. An economic union between these nations could further boost its future prospects. The creation of lower trade barriers and a new national union will give member nations a competitive advantage.

Assuming the World Bank is correct and further declines await the BRICS nations in 2016, this could cause a further decrease in global confidence. Consumer sentiment would continue to drop due to stock market fluctuations, and this would harm economies with high proportions of exports dependent on any of the BRICS economies, as the currency depreciates in these countries imports will become more expensive. Ultimately unless certain policies are put into effect, the outlook is generally negative for the rest of the world.

For the first decade of the 21st century, it seemed a given that developing economies would keep growing at rates higher than the developed world. The economic slowdown that seem to affect all members of BRICS has gathered strong attention. These countries’ fates are proxies to emerging markets’, and perhaps the world economy’s, future. Whether they will be overcome or not, these economic slowdowns have consequences that no one can afford to ignore.

References:

http://www.huffingtonpost.com/obadias-ndaba/the-world-halved-global-p_b_6212494.html

http://brics.itamaraty.gov.br/about-brics/economic-data

http://time.com/4106094/goldman-sachs-brics/

Pacheco Filipe. February 18th 2016. “Brazil’s Rating Cut Further Into Junk Territory By S&P”. Bloomberg.com. Retrieved March 23, 2016 (http://www.bloomberg.com/news/articles/2016-02-17/brazil-s-credit-rating-cut-further-into-junk-territory-by-s-p).

Makortoff, Kalyeena. 2016. “Worrying Data Raise Russia Recession Odds: Economist”. CNBC. Retrieved March 23, 2016 (http://www.cnbc.com/2016/01/25/worrying-data-raise-russia-recession-odds-economist.html).

Bowler, Tim. 2016. “Falling Oil Prices: Who Are The Winners And Losers? – BBC News”. BBC News. Retrieved March 23, 2016 (http://www.bbc.com/news/business-29643612).

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http://www.weforum.org/agenda/2015/12/how-have-emerging-economies-transformed-the-global-economy

http://time.com/4106094/goldman-sachs-brics/

http://www.bricsmagazine.com/en/articles/imagine-brics-four-scenarios-of-the-future

https://www.weforum.org/agenda/2015/08/what-is-new-about-the-new-development-bank/

–      The Brics collapse, the south staggers: and the almighty dollar is back. (2015). the Guardian. Retrieved 20 March 2016, from http://www.theguardian.com/business/2015/sep/13/brics-collapse-south-staggers-dollar-almighty

–      Hashemi, F. (2016). World Bank warns of gloomy 2016 for most BRICS nations – International Accounting Bulletin. Internationalaccountingbulletin.com. Retrieved 20 March 2016, from http://www.internationalaccountingbulletin.com/news/world-bank-warns-of-gloomy-2016-for-most-brics-nations-4773920/

–      Yueh, L. (2015). How a Chinese slowdown will hit global growth. The Conversation. Retrieved 20 March 2016, from http://theconversation.com/how-a-chinese-slowdown-will-hit-global-growth-46655

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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, its Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Heath Gilham
Editor
Quoc Anh Nguyen
Writer
Max Yang
Writer
Kevin Kingsley
Writer
Daniel Pederick
Writer