In 2001, Jim O’Neill professed:
“…a healthier environment for the BRICs seems likely to remain, and as a result, their share of world GDP is set to rise”
in his report entitled ‘Building Better Global Economic BRICs,’ published by Goldman Sachs. He pointed out the GDP growth (projections adjusted for Purchasing Power Parity) that Brazil, Russia, India, and China would achieve in comparison with the world’s most industrialized economies. These countries would give place to the world’s latest economic acronym, BRIC.
Dominic Wilson and Roopa Purushothaman promoted this same idea in their report entitled ‘Dreaming with BRICs: The Path to 2050,’ published by Goldman Sachs in 2003. They extended the power of the BRIC, predicting these countries wealth as heavier than those of the leading economic powers (G7).
To a large extent, China and India will become the top producers and suppliers of goods and services, leaving Russia and Brazil as the suppliers in charge of the raw material. They will function as an economic block, trading between each other for their mutual benefit. That being so, investors will look for these emerging economies as a bargain for future opportunities. In 2011, South Africa completed the list, giving birth to the BRICS. Other countries like Indonesia, Mexico, South Korea and Turkey are still present as options for extending O’Neills original concept.
Although there has been extended significance and presence of BRICS in the last decade, these countries are currently in a struggle. Brazil is the seventh largest economy in the world. Despite the fact of being also one of the most populated countries and possessing a vast territory, their GDP has plummeted since 2012, with negative GDP annual growth since 2014.
The annual inflation rate has been rising steadily and is the highest since November 2003, achieving for the fifth consecutive month, numbers above 8 percent. The result of this is that the purchasing power of consumers has been declining, as their currency weakens. Since the low in 2011, the value of Brazilian Real has weakening against USD, not only because of dollar strength but also because of local currency depreciation.
The global concern is when the FED will start raising rates. By 2008, the FED had cut interest rates to 0.25% and commenced in 2009 with QE stimulation packages. The monetary policy of USA maintains in a dovish path, but seeking for US strength signals to change to hawkish, with QE removal and the raising of interest rates.
The unemployment rate is at the highest pick in the past five years. Additionally the Leading Economic Index (which reflects the performance of the three main sectors of the economy: agriculture, industry and services) is decreasing.
Not only is the hard data struggling but also the soft data in charge of leading the future development. Guided by political issues, which mostly arise with the Petrobras scandal. Dilma Rousseff’s approval ratings are at their lowest values (7.7%), which limits her power to manoeuvre Brazil out of the path of their next recession. Corruption and economic downturn are the words that are hitting Dilma’s popularity to emost, as the possibility of impeachment is latent.
Almost 70% of Brazilian citizens blame Rousseff for the Petrobras scandal. Petrobras, the state oil producer of Brazil, is under investigation within bribery and money laundering.
Furthermore, commodities are not finding their floor. China, who is the major player in commodities transactions, has been delivering bad economic data as their economic growth is declining for the past five years. In the last weeks, the major notice was the devaluation of the Yuan as a way to combat the slowdown (greatest devaluation in two decades), making the exports cheaper to stimulate economic growth. However, the markets did not react as we would expected, and the Asian markets suffer as the investors do not see the central bank as a guarantee to support the economy anymore.
Credit rating agencies are already taking their decisions. S&P was the first to move to a level just above investment grade since March 2014. Moody’s followed S&P and downgraded to Baa3 a couple of weeks ago (lowest investment grade of the agency). Fitch in the other hand maintains at BBB level since April, one above the rest of their peers.
Questions on investors minds would be whether Brazil still demonstrates the potential that Jim O’Neill reported over a decade ago, or is Brazil indeed entering into the perfect storm.