The Brics have gone off the boil

A recent summit of the leading emerging-market economies has failed to make headway.

Few acronyms coined by investment bank analysts are recognised outside their bank. But Bric' is an exception. Jim O'Neill of Goldman Sachs first came up with the term in 2001. Concerned with how non-Western economies would wield more power in future, he noted that the Brics Brazil, Russia, India and China all had huge populations, underdeveloped economies and governments keen to embrace global markets.

Since 2001, Bric has become a strong brand. It shaped multinationals' emerging market strategies and spawned a think-tank and an annual summit, now known as Brics, since South Africa was asked to join.

Yet the Brics bubble is now hissing air. This year's summit, last week, made scant progress on creating a Bric development bank, and the economies "rarely generate the same excitement as before among investors", says the Financial Times. They have gone off the boil, with only China now growing by more than 5% a year. In 2007, they all were.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Brazil and Russia slow sharply

"The Brics' story has become the China and India story," as Thomas Pascoe puts it on As far as Brazil is concerned, the global slowdown, which has crimped commodity exports, has coincided with faltering consumption as a decade-long credit boom has left households weighed down with debt.

Growth reached just 0.9% last year. The government is trying to bolster investment, which needs to rise if Brazil's potential growth rate is to increase. Red tape and a complex tax burden are also ongoing obstacles.

Russia has also slowed to a crawl as investment has declined and consumers have taken a breather from shopping to rebuild their savings. Meanwhile, the longer-term outlook is clouded by overdependence on oil and gas and signs that "the decade-long liberal consensus in economic policy under Putin is shifting", says Charles Clover in the FT.

The state has taken over BP's former joint venture for $55bn. The government has put pressure on the central bank to loosen monetary policy, although inflation is still at 7%.

The trouble in India is largely self-inflicted. Government overspending, which crowded out private investment, and sagging momentum on the structural reform front, have undermined growth. But recently things have begun to look up.

Finance minister Palaniappan Chidambaram has "won almost universal praise" for recent moves, says the FT's Victor Mallet. He has sped up privatisation, cut diesel subsidies and opened up the retail sector to foreign investment. But all these changes will take time to bear fruit, while populist policies in the run-up to elections next year could hamper growth which, at about 5% over the past year, is at a decade low.

China vulnerable to financial crisis

China continues to look a lot like America before its housing crash, notes a Nomura report. House prices have shot up, with the official index showing a 113% rise in the major cities between 2004 and 2012. But that gauge is flawed, reckon the analysts.

A recent study points to a 250% rise between 2004 and 2009. Then there's the jump in leverage in the economy. Domestic credit bank loan books and state and corporate bond holdings has soared from 121% of GDP in 2007 to 155%.

Meanwhile, according to three major banks, bad loans in the Shanghai region jumped by a quarter between June and December 2012, says John Foley on Breakingviews. "If the credit cycle turns down in earnest, distress in the East" will spread. With the cracks in the Brics spreading, it's no wonder emerging market investors are heading for new stars.