BRIC Shoppers Will ‘Rescue World’ Goldman Sachs Says
Dec. 1 (Bloomberg) -- The best hope to keep the global economy growing may be people like Wei Yufang. A peasant who farms a small plot beside the mud-brown Huaihe River in central China, Wei has a modest dream: to buy an air conditioner to give her family relief from the dusty heat that each summer envelops Xiaogang (Little Hill) village in Anhui province.
With economies from the U.S. to Japan in recession, Wei and the other 2.8 billion people in Brazil, Russia, India and China may provide the consumer demand needed to counter the slump.
Jim O’Neill, the Goldman Sachs Group Inc. economist who in 2001 coined the acronym BRIC from the initials of the four big emerging economies, says the faster growth investors have come to expect from these countries will survive this crisis. O’Neill, who is based in London, says the citizens of the BRIC nations are poised to spend more. “The BRIC consumer is going to rescue the world,” he says.
China’s leaders are doing their part. The massive 4 trillion yuan ($586 billion) stimulus plan they unveiled on Nov. 9 signaled their intent to spur domestic consumption to help pick up the slack left as developed economies buy fewer Chinese exports. The first-ever meeting of finance ministers from the BRIC nations, a few days earlier in Sao Paulo, charted a newly assertive role.
“The crisis revealed weakness in risk management, regulation and supervision in the financial sectors of some advanced economies,” the ministers said in a statement. It also showed the resilience of the BRIC economies, they said.
‘Global Solutions’
“This is a global crisis and demands global solutions,” says Brazilian President Luiz Ignacio Lula da Silva. “The participation of the developing world is essential.”
Chinese President Hu Jintao said at a summit in Washington on Nov. 15: “Steady and relatively fast growth in China is in itself an important contribution to international financial stability.”
Economic leadership from these nations wasn’t part of the mix in 1997 and 1998, when currency devaluations and excessive debt threw Asia and then Russia into crisis. Back then, the world looked mostly to the U.S. to spark a rebound.
China’s two-year stimulus program calls for spending on housing, roads, railways and airports; tax deductions for businesses that invest in new equipment; and subsidies for farmers.
Chinese Consumers
Equal to about 16 percent of the country’s annual gross domestic product, the plan dwarfs the $168 billion stimulus in the U.S. in the spring of 2008, which was about 1 percent of GDP. In the weeks since the Chinese effort was announced, President-elect Barack Obama has said he favors a larger stimulus for the U.S. economy; his aides have said it could top $600 billion.
While Chinese consumers, as a group, still don’t overshadow their American counterparts in total spending, their outlays are growing. China’s retail sales jumped 22 percent in October. Consumer purchases in the U.S., by contrast, dropped in the third quarter for the first time in seven years.
“Since October 2007, the Chinese shopper alone has been contributing more to global GDP growth than the American consumer,” O’Neill, 51, says.
The BRIC economies are performing better overall than O’Neill forecast when he unveiled the term in a November 2001 report. He predicted they would account for 10 percent of global economic output by 2010. Already, they comprise more than 15 percent.
‘Hit the Hardest’
Forecasters at Merrill Lynch & Co. share the enthusiasm. “Can BRICs help stabilize the global economy?” Merrill’s global economics team asked in an October report. “We think so.”
This doesn’t mean that the downdrafts being felt by the BRIC nations don’t hurt. “A year ago everyone was so optimistic about emerging markets,” says Marc Faber, who manages $300 million in Hong Kong. “Now the global economy is going into a severe recession and it is the most volatile economies -- the emerging markets--that are being hit the hardest,” says Faber, publisher of the Gloom, Boom and Doom Report.
The BRIC countries’ stock markets have seen big swings. The benchmark index in Shanghai has been down as much as 70 percent from its high, while Moscow’s stock market has fallen as much as 75 percent from its peak.
At its peak in May 2008, Brazil’s Bovespa Index had quadrupled in four years. By late October, the index was down 60 percent from its May high. Brazil’s real in August and September erased two years of gains against the dollar and euro.
Mobius’s ‘Candy Shop’
The question is whether a deeper collapse is coming -- or a turnaround. Mark Mobius, the Singapore-based money manager, says BRIC markets are a buying opportunity. “We’re like children in a candy shop,” says Mobius, 71, who oversees $30 billion in emerging-market equities at Templeton Asset Management Ltd.
The obstacles the BRIC nations have to negotiate include the cutoff of capital as U.S. and European banks refuse to lend. Japan and Germany are in recessions, recent economic data show, while the U.K. and U.S. economies are also shrinking. That means lower demand for products from China, services from India and energy and metals from Russia and Brazil.
China’s booming economy, which expanded by 9.9 percent a year for three decades, may slow to 7.3 percent in 2009, says China International Capital Corp., a Beijing investment bank. Growth in India may drop to 6.5 percent in 2009, from 9 percent in the year ended in March 2008, according to CLSA Asia-Pacific Markets, part of the French bank Credit Agricole SA.
Mumbai Attacks
India’s Palaniappan Chidambaram, who served for four and a half years as finance minister under Prime Minister Manmohan Singh, has said the country’s economy won’t be hobbled by the terrorist attacks that left at least 195 people dead in Mumbai last week. Chidambaram was tapped to become Home Minister after Shivraj Patil resigned because of the intelligence and security failures that led to the worst terrorist violence in India in 15 years.
Chidambaram predicted in a Nov. 28 interview that India will maintain 9 percent growth. Mobius, speaking after the attacks, said India remains a fast-growing economy and that the attacks shouldn’t color investment decisions there.
In Brazil, meanwhile, growth may slow to 2 percent or less, from about 5 percent in 2008, as vital exports of iron ore and other commodities slow, according to Morgan Stanley.
Plunging Oil Price
Growth in Russia, the world’s second-largest oil producer, after Saudi Arabia, may drop to 3 percent in 2009, according to Arkady Dvorkovich, an adviser to President Dmitry Medvedev. Growth topped 8 percent in 2007, according to the Russian government.
“The oil price is the main transmission route of the crisis to Russia,” says Vladimir Osakovsky, senior economist in Moscow for Italy’s UniCredit SpA. Crude oil is down 63 percent from its July record, trading at about $54 a barrel in London at the end of last week. The government has raised interest rates and spent foreign currency reserves to try to halt a slide in the value of the ruble. The Russian currency lost 3 percent against the euro last week. Investors have pulled $190 billion out of the country since August, according to French bank BNP Paribas SA.
BRIC bulls like O’Neill say the four countries are much better prepared for this global economic crisis than they were for the turmoil of a decade ago. Banking systems are stronger and international trade has expanded. Most important, the governments of the BRIC nations have accumulated some of the world’s largest financial reserves.
Currency Reserves
The four BRIC nations combined held 41 percent of total global foreign exchange reserves as of early November. Russia’s reserves are the third biggest, after China’s and Japan’s, though the government used about 20 percent of its hoard from August to mid-November to support the ruble. China’s $1.9 trillion stockpile helped make possible the giant November stimulus, targeted to the spending habits of citizens such as Wei Yufang.
China’s Communist government has already given people like Wei a push up the economic ladder. Changes in land ownership rules mean Wei, 41, can rent out some of her plot to another farmer, who grows grapes. She also plans to seek a bank loan against her landholding. “My family’s already feeling richer,” Wei says. Investors worldwide should hope the feeling lasts.
To contact the reporters on this story: William Mellor in Hong Kong at wmellor@bloomberg.net; Le-Min Lim in Hong Kong at lmlim@bloomberg.net.
