Disappointed with the BRICS
3 min read 02 May 2012, 08:24 PM ISTDisappointed with the BRICS
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Why don’t we have the 9%-plus annual rates of growth we saw during 2004-07? We all know the answers, don’t we? The policy paralysis of a lame duck government bears a large part of the blame, interest rates are too high, the government’s fiscal deficit is a scandal, too much is spent on populist programmes, the current account deficit is not sustainable and political uncertainty is a bugbear. It’s undeniable that all these factors have hobbled growth. The International Monetary Fund (IMF) predicts that gross domestic product (GDP) growth this calendar year for India will be a mere 6.9%, a far cry from the 9.99% notched up in 2007.
But maybe China faces another unique set of challenges that have constrained its economy. What about Brazil? Has its economy been able to do better? Not at all—while it grew by 6.09% in 2007, IMF thinks its growth this year will be a measly 3.02%. So let’s take a look at how Russia is doing—with all that oil wealth, it should be prospering, right? Once again, not really. In 2007, the Russian economy expanded by a huge 8.5%; in 2012, IMF estimates peg growth at 4%. That wraps up the BRIC economies, those wunderkinds of the noughties. Sometimes, however, the BRIC acronym is expanded to include South Africa, becoming BRICS. Well, South Africa is very much in the same boat, with growth expected to slump to 2.65% in 2012, far below 2007’s 5.54%.
What about the rest of the developing world? According to IMF, “emerging and developing economies" grew at 8.7% in 2007 and are expected to grow by 5.7% this year. Growth has fallen by 3 percentage points, which is exactly equal to the fall in growth in India.
India’s share of world GDP (based on purchasing power parity) has risen from 4.66% in 2007 to 5.6% in 2011. Over the same period, China’s share has gone up from 10.98% to 14.32% and Brazil’s from 2.78% to 2.90%. Russia and South Africa’s share of global GDP, however, have fallen a bit. Clearly, the performance of the Indian economy, despite the policy paralysis, the high interest rates, the fiscal deficit et al, compared with the BRICS has been rather good.
How has the performance of these economies been reflected in the stock markets? Well, the MSCI emerging markets index has given an annualized return of 1.5% (in local currency terms) over the last five years. MSCI India has given annualized returns in local currency of 3.7% in the last five years, compared with 2.5% for MSCI China, 2.4% for MSCI Brazil, 3.9% for MSCI South Africa and -8% for MSCI Russia. It’s a terrible performance, with returns far below inflation, but the Indian market hasn’t done badly when compared with the other BRICS markets, or with emerging markets in general.
Is there an economy which has seen economic growth recover to almost the 2007 level and where markets too have rallied? Indonesia is one such wonderland: GDP growth in 2007 was 6.3% and IMF estimates growth in 2011 to have been 6.4%. This year growth is expected to fall to 6.1%, but will bounce back to 6.6% in 2013, according to IMF projections. Unlike the BRICS economies, growth in the Indonesian economy has not really been affected at all after the financial crisis in the West. Investors have warmed to the economy’s resilience and MSCI Indonesia has returned, in local currency, an extraordinary 13.6% annualized over the last five years. Indonesia is a country blessed with natural resources, but it must also be doing a lot of things right.
It’s not as if the BRICS economies have crumbled. But their earlier performance had set the bar high and had raised investor expectations. Their inability to return to the earlier high growth rates has therefore been a disappointment. In contrast, Indonesia has done much better than expected and the markets have rewarded it accordingly.
Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com
Also Read | Manas Chakravarty’s earlier columns
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