Beware of falling BRICS
The attacks on Mumbai underscored the frailty of the world today. It is complex enough with the financial crisis at hand, but unduly challenging if you throw terrorist attacks on top. Strike while the enemy is weak seems to be the rule of thumb here.
India, one of four BRIC countries -- Brazil, Russia, India and China -- has come a long way since the 9/11 terrorist attacks which shook the world. India’s main market index surged 390 percent since 2001 through September of this year and that is factoring in the sizable correction in 2008. Economic growth has averaged eight percent in that timeframe. Brazil, Russia and China posted equally impressive gains of 345 percent, 639 percent and 500 percent in the same period.
All four of these BRIC countries have been forced to take a big pause or as Florence Eid, Managing Director of Passport Capital noted during a speech with business executives this week, “The train may be stopped, but it is still steaming.”
This is not dissimilar to the story throughout the Middle East. Stock markets in the region are down between 30 and 70 percent in 2008. That is not insignificant because an estimated $1 trillion of market capitalization was wiped out in short order.
The concern through the first half was too much liquidity chasing too few products. The story almost put to bed in the second half of the year is all about a lack of liquidity to fund the $1 trillion of projects now on the books in the region.
It is in that spirit that Saudi Arabia’s central bank decided to move decisively with a cut of one percent to its main lending rate.
“This is no time for inching right? We have seen 100 basis point cuts right around the world,” said Eid, “The Saudi Central Bank is acting in the very same manner. There is no time to wait. There is no time to reflect what is going on. It is time to move and they moved fast.”
It is the same reason Abu Dhabi stepped up support for Dubai’s property sector. The federal government provided $13 billion to form the Emirates Development Bank and absorb the assets of lenders Amlak and Tamweel. This was quickly followed by the creation of a new national entity Abu Dhabi Finance. No one wanted to see this train parked in the station too long -- with or without steam. Some noted this might mark the beginning of the end to the property drops we have witnessed over the past two months. Let’s see if the risk premium of two percentage points above LIBOR will come down as a result.
While some may be writing clever headlines about “Crumbling BRICS” or “BRICS on shaky ground,” one should definitely rollout the master blueprint. The Paris-based think tank of the industrialized world, the OECD put it into context recently, projecting that the 30 member countries will contract by 0.3 percent next year. In sum, all, ALL of the growth for 2009 will come from the BRIC countries and their faster growing brethren. China, India and the Middle East may be lucky to eek out six percent economic growth next year, but that is six percent better than we are seeing elsewhere right now.
Earlier this year at the World Economic Forum annual meeting in Davos, there was a great deal of buzz around the concept of de-coupling, that the fast growing economies would break free from the shackles of their slower growing counterparts in the G7. That theory was given far too much airtime, since countries like Saudi Arabia, China and India are still very dependent on Western demand and Western investment. This co-dependency was enough to knock at least two percentage points of growth off for each country this year.
Tony Angel, Managing Director of EMEA for Standard & Poors, at the same gathering of business executives said the relationship between the G7 and the rest of the world is tighter than ever. One lesson we learned from this mammoth downturn is that emerging markets are “embedded in the world economy.” That too, said Angel, is a good thing since it is “time to move on from a uni-polar world.”
Companies of the emerging market countries have moved well down the track this decade. The names of SABIC (Saudi Arabia), Lenovo, Haier (Chinese), Tata, Ranbaxy (Indian) and Embraer (Brazil) should all sound familiar to those of us in the business. All six have emerged as major players either through their global growth or by acquisition of global counterparts.
With a bit of research, I found that the term “emerging markets” was coined in 1981 by World Bank economist Antoine van Agtmael. So, in less than three decades these economies have become not only magnets for foreign direct investment but as capital generators in their own right.
They have their own set of challenges; the risk of a harder economic landing is there and the train may be paused at the station, but demographics and growth are on their side.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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