Short article with quick update on prospects for BRICs

Good for context:

  Broken BRICs: A Shifting Center Of Gravity Among The Emerging Market Giants Mar. 15, 2015 

 BRICs: Strong, solid, steadfast, quite literally the building blocks of growth. 

First coined by Goldman Sachs' Jim O'Neill in 2001, the umbrella term for the major emerging market economies of Brazil, Russia, India, and China made for a compelling story among investors by capturing widespread views over the trajectory of the global economy. BRICs became a household phrase following the onset of financial crises and recessions among advanced economies in 2008. The United States was struggling to escape stagnation, the Eurozone found itself shackled by a common currency, and Japan's decade-long deflationary malady intensified. 

Meanwhile, the BRICs enjoyed near double-digit GDP growth, with no more than a brief interruption in 2009, and a flood of capital from yield-hungry investors looking for an alternative to the low returns on U.S. bonds and equities. Emerging Problems Unfortunately, the BRICs' fortunes have reversed. China's export prowess has faltered and its economy has slowed. 

The "commodities super cycle," which saw Brazil and Russia supply China with the raw inputs it needed to sustain a massive trade surplus, has ground to a halt, contributing to historically low oil prices. Portfolio investment may continue to recede as the United States prepares to raise interest rates, exposing cracks in the BRICs that could be signs of difficult times to come. 

Weaker exports and portfolio investment hamper growth. 

Since the foreign currency used by consumers and investors to purchase exports and portfolio securities eventually winds up with central banks, their access to foreign exchange reserves may come under strain. Dwindling reserves limit central banks' scope to prop up currencies by intervening in foreign exchange markets. This undermines their capacity to guarantee the foreign-denominated debts of their governments and financial systems. 

The fiscal positions of governments reliant on revenue from state-owned oil companies will also deteriorate in the face of low prices. As currencies depreciate, the relative value of revenues denominated in domestic currency and used to service foreign-denominated debts declines, imposing a growing debt burden on borrowers. 

To make matters worse, inflation may take off as the price of imports increases, in effect reducing consumers' real income via higher prices. 

 Misery Loves Company 

 Brazil and Russia share some unhappy similarities. Both economies are reliant on petroleum and commodities exports and are already feeling the pinch from dramatically lower prices. Both have highly indebted corporate sectors, and since much of this debt is denominated in dollars, the weakness in their currencies may yet cause a string of defaults. Where they differ is in their willingness to reform and woo investors. 

Brazil's President, Dilma Rousseff, has taken bold steps to try to improve the country's bloated government finances, though her left-wing congress may still thwart her efforts. 

While Brazil's economy may languish as a result of its leader's inability to reform, Russia's will more than likely continue to suffer, thanks to President Putin's unwillingness to do so. A de-escalation of the war in Ukraine and the lifting of sanctions would help reverse the 50% depreciation in the value of the ruble since August, 2014. Unfortunately, his record of intransigence is less than encouraging. 

It's all downhill from here unless oil makes a comeback, which some industry leaders have suggested. 

 China is beginning to suffer growing pains as it attempts to transition from an export-led economy to a consumer-based one. Rising wages and the appreciation of the renminbi as the government attempts to achieve reserve currency clout have undermined China's export competitiveness. Manufacturers reliant on cheap labor no longer look to China, preferring Vietnam or the Philippines. 

Several trillion dollars of public investment spent trying to counteract the shock of the Great Recession have dried up - much of it was wasted. Consumption and private investment meanwhile haven't grown enough to pick up the slack left by shrinking government expenditures. 

China's opaque and extensive shadow-banking system worries many investors, leaving them to wonder if complex debt liabilities of an unknown scale represent a ticking time bomb. 

 There's a New Sheriff in Town 

India, on the other hand, is a net importer of energy products; falling prices will actually improve its current account. Narendra Modi, India's newly elected Prime Minister, has demonstrated his pragmatism and desire for reform, taking advantage of the fall in energy prices to cut wasteful state fuel subsidies. He now plans to reform complex labor laws and invest in public infrastructure. 

Previous government's failure to do so has prevented India from becoming a manufacturing economy on par with China. India is one of the only countries in the world that requires large industrial employers to get approval from public officials before firing employees. 

Thanks to its import composition and Modi's reputation as the darling of international investors, India looks best positioned to weather the storm of capital flight and falling oil prices. India's currency has outperformed most of its emerging market peers by miles. 

 To be fair, the divergent fundamentals of the BRICs economies have been longstanding. However, unlike the BRICs of the boom years, the BRICs of 2015 are no longer the engines of global growth, but are instead being superseded by advanced economies and their smaller emerging market peers. 

 Ultra-low interest rates in the Eurozone and Japan will hopefully keep yield-hungry investors actively engaged in emerging markets; otherwise, the BRICs can no longer expect to be the joint beneficiaries of easy money. All this calls into question the wisdom of conflating a group of countries with radically divergent profiles. 

 The BRICs are cracking, some more worryingly than others. Their leaders must take bold steps to reinforce the foundations of their economies through structural reforms, lest their houses come crashing down around them.