Emerging Markets

Has The BRICS Bubble Burst?

BRICS - SputnikThe political crisis in Brazil over economic mismanagement and high-level corruption, likely to come to a head next week, has reinforced the fashionable view, popular among western governments and businesses, that the BRICS bubble has burst.

Members of the exclusive BRICS club of leading developing countries – Brazil, Russia, India, China and South Africa – are failing to justify predictions that, separately and together, they will dominate the 21st century world, or so the argument goes.

The BRICS concept, plus acronym, was dreamed up in 2001 by Jim O’Neill, chairman of Goldman Sachs Asset Management. He highlighted the combined potential of non-western powers controlling one quarter of the world’s land mass and accounting for more than 40% of its population.

O’Neill’s idea morphed into a formal association, with South Africa joining the original Bric group in 2011. The five nations, with a joint estimated GDP of $16tn, set up their own development bank in parallel to the US-dominated IMF and World Bank and hold summits rivalling the G7 forum. Their next meeting will be in Goa, India, in October.

But ambitious plans to create an alternative reserve currency to the US dollar and challenge American dominance in IT and global security surveillance have come to little. Meanwhile, adverse economic conditions compounded by falling global demand and lower oil and commodity prices are taking their toll.

Last November, Goldman Sachs, where the idea originated, closed its BRIC investment fund after assets reportedly declined in value by 88% from a 2010 peak. The bank told the US securities and exchange commission it did not expect “significant asset growth in the foreseeable future”.

“The promise of BRICS rapid and sustainable growth has been challenged very much for the last five years or so,” Jorge Mariscal, the chief investment officer of emerging markets at UBS Wealth Management, told Bloomberg Business. “The BRIC concept was popular. But nothing is eternal.”

The problems facing BRICS members are remarkably similar, even though each country is different. Russia and Brazil have both fallen into recession, while China, the principal engine of world growth, has seen a sharp contraction in overall economic activity.

Brazil’s economic woes have been compounded by scandals that could yet force the resignation or impeachment of Dilma Rousseff, the country’s president, and the trial of her predecessor, Luiz Inácio Lula da Silva (Lula). With about a quarter of members of Brazil’s congress facing some form of criminal investigation, the crisis has become structural and existential in scope, raising worries about the durability of Brazil’s young democracy.

Identical concerns have arisen in South Africa where Jacob Zuma, the country’s president, and the ruling African National Congress government are beset by allegations of corruption and malfeasance. Big questions surround the influence wielded by private individuals and businesses over government appointments and policies. The backdrop is under-performing state-owned companies, a depreciating currency, falling exports and rising inflation.

Read more from The Guardian


Courtesy of Guardian News & Media Ltd © 2016

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