MacroScope

Volkswagen's Brazil car factory. Sales are booming as the economy roars ahead

Distracted by the upheaval in the Middle East and $120 per barrel oil,  few noted Brazil’s ascent last week to the ranks of the world’s top five economies. Strange given that the move comes just months after China displaced Japan as the second-biggest economy in the world.

Goldman Sachs Asset Management head Jim O’Neill points out that  Brazil — part of the BRIC group of big emerging economies – grew 7.5 percent in 2010. By the end of last year the economy was valued around $2.2 trillion. That’s next only to the United States, China, Japan and Germany. And bigger than France and Britain.

O’Neill, who coined the BRICs concept in 2001, says the achievement has come earlier than he had expected. But then Goldman analysts had expected China to overtake Japan only in 2015.

Brazil is unlikely to continue growing at last year’s annual rate of 7.5 percent which was a 24-year high. O’Neill expects trend growth closer to the 5 percent level. But BRIC juggernaut looks unstoppable –  Goldman’s latest forecast is for the BRICs’ combined economies to match the G7 rich states in the next decade and overtake the United States by 2018.

Jim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?

In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.

Hmmm.  Doesn't quite grab you like BRICs, does it? The Guardian helpfully offers an amended branding banner of  "Bric 'n Mitsk" (geddit?). But which ever way you cut it, it's hard to see a flood of investment conferences and funds floating off under the new moniker.

How quickly times change. Russia's stock market, unloved for months, last week overtook India to be the best-performing of
the four BRICs.  The Moscow stock index jumped 5 percent last week, posting its biggest weekly rise in seven months, bringing
year-to-date gains to 17.5 percent. Fund managers such as Goldman Sach's Jim O'Neill, creator of the BRICs term, are predicting it will lead the group next year too.

So what's with the sudden burst of enthusiasm for Moscow? One catalyst is of course soccer body FIFA's decision to award
the 2018 Soccer World cup to Russia. Investors are piling into infrastructure stocks, with steel producers especially tipped to
benefit as Russia starts building stadia, roads and hotels.  But the bigger factor, according to John Lomax, HSBC's head of emerging equity strategy, is the optimism that has started creeping in about U.S. -- and world economic growth.

Some of that may have been dampened by Friday's lacklustre U.S. jobs data. But overall, checks of U.S. economic vital signs show the economy looking sturdier than it was six months ago and most banks, including the pessimists at Goldman Sachs, have upped 2011 growth forecasts for the world's biggest economy. And China and India are continuing to grow at rates close to 10 percent.  All that is great news for the commodity and oil stocks -- the mainstay of the Russian market. Merrill Lynch, for instance, expects oil prices to be $10 higher by next December than now.

Some eye-catching numbers from Standard Bank out today on the influence of BRICs countries — Brazil, Russia, India and China — on Africa.

First off, the bank says the global recession and its recovery have been nourishing these so-called South-South ties. But it is all now ready to take off. The bank estimates:

– By 2015, BRIC-Africa trade will have incresed threefold, to $530 billion from $150 billion this year.

Do capital controls work?  After years of telling us that they do not, the IMF and World Bank reluctantly conceded last year they may not be all that bad and indeed in some cases they may actually help keep away some of the speculators who have in recent years been pouring into emerging markets.

Developing countries for the most part like foreign capital, indeed they rely on it for development. What they don't like is hot money -- short-term speculative flows which are widely blamed for causing past emerging market crises. So starting from October last year several of them slapped controls on some of this cash. There are signs these may be working.

Take the experience of two large emerging markets, Brazil and Indonesia. Brazil shocked foreign investors last October with a 2 percent tax on all flows to stocks and bonds. Nine months on, investors are still putting their cash there and Brazil has raked in millions of dollars thanks to the tax. But many fund managers, like HSBC's Jose Cuervo, who runs a $6 billion portfolio of Brazilian stocks, are buying American Depositary Receipts (ADRS) of Brazilian firms rather than stocks listed in Sao Paulo.  Because ADRs are in dollars and listed in New York, investors are getting exposure to Brazil but sidestepping the tax.  Brazilian firms continue to receive investment but Brazil's currency is not appreciating  like it was last year. A win-win all around.

The euro zone sovereign debt crisis has not made a near-term collapse of the bloc any more  likely, a survey on hihifrds.com, a website devoted to the Thomson Reuters FX and money markets trading community, suggests.

The survey asked whether all 16 countries currently using the euro would still be doing so by the end of 2012. Fully 88 percent of respondents said they would.

Maybe the 16 euro zone members are tied to the single currency for now but others have more choice. Russian President Dmitry Medvedev and  his Brazilian counterpart Luiz Inacio Lula da Silva have  agreed to consider how to make more use  of their own currencies in bilateral trade, rather than the euro or dollar.

Some fascinating data about the growing power of emerging markets, particularly the BRICs, was on display at the OECD's annual investment conference in Paris this week. Not the least of it came from MIGA, the World Bank's Multilateral Investment Guarantee Agency, which tries to help protect foreign direct investors from various forms of political risk.

MIGA has mainly focused on encouraging investment into developing countries, but a lot of its latest work is about investment from emerging economies.

This has been exploding over the past decade. Net outward investment from developing countries reached $198 billion in 2008 from around $20 billion in 2000. The 2008 figure was only 10.8 percent of global FDI, but it was just 1.4 percent in 2000.

It may end up sounding like a famous ball-point pen maker, but an argument is being made that Goldman Sach's famous marketing device, the BRICs, should really be the BICs. Does Russia really deserve to be a BRIC, asks Anders Åslund, senior fellow at the Peterson Institute for International Economics, in an article for Foreign Policy.

Åslund, who is also co-author with Andrew Kuchins of "The Russian Balance Sheet", reckons the Russia of Putin and Medvedev is just not worthy of inclusion alongside Brazil, India and China  in the list of blue-chip economic powerhouses. He writes:

The country's economic performance has plummeted to such a dismal level that one must ask whether it is entitled to have any say at all on the global economy, compared with the other, more functional members of its cohort.

Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls “imbalance- and bubble-building”.

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to “sequence” the great unwinding.

Henrique Meirelles, Brazil’s highly rated central bank president, gave unusual insight into current thinking at the International Olympic Committee in a speech in Oxford the other night.

Diverging from his main theme on Brazil’s remarkable journey from economic basket case to emerging market superpower, Meirelles said that he had gone to Copenhagen last month as part of Rio de Janeiro’s successful bid for the 2016 Olympics. The reason: The IOC asked him to come.

Meirelles said that the IOC knew that Brazil currently had all the conditions needed to host the Games, but wanted to know about how predictable it was that this would carry through over the next seven years. “They wanted to know what is really happening,” he said.