Economic Analysis - Two-Speed BRICS - NOV 2017


BMI View: The BRICS countries will continue to fall into two distinct camps in terms of their economic growth rates. China and India will outperform as they reap the benefit of a wave of reforms, while Brazil, Russia and South Africa undergo anaemic growth stemming from subdued commodity prices and policy uncertainty.

Editor ' s note: Ahead of the ninth annual BRICS summit set to be held over September 3-5, 2017, in Xiamen, China, we take this opportunity to outline our expectations regarding the relative economic performance of the five countries.

The BRICS economies (Brazil, Russia, India, China and South Africa) have been divided into two distinct camps in terms of their economic growth rates over recent years, and we expect this pattern of 'two-speed growth' to persist over the coming five years. We forecast that China and India will remain in the fast lane, with annual real GDP growth in the 5-7% region (albeit with China noticeably slowing down over the coming years), while Brazil, Russia and South Africa limp along with annual growth of under 2.5%.

Two Different Gears
BRICS - Real GDP Growth, %
Source: National Sources/BMI

The reasons behind the growth dichotomy are many and varied, but we identify several key themes:

  • Reformers outperform: The Chinese and Indian governments have been implementing business-friendly reforms in various sectors, creating a more attractive environment for investors.

  • Commodity exporters struggle to recover: Brazil, Russia and South Africa are grappling with 'lower for longer' commodity prices, entailing subdued revenues and tepid investment. The sluggish pace of business-friendly reforms will likely exacerbate the dearth of investment.

  • Policy uncertainty weighs on investment: The direction of policy in Brazil and South Africa is very uncertain owing to divisions in the government and impending elections for which the outcomes are difficult to predict.

Reformers Outperform (China, India)

Over recent years, the governments of China and India have been implementing a broad swathe of structural economic reforms which have encouraged private investment. In contrast, Brazil, Russia and South Africa have seen sluggish reforms, and the relative lack of progress on this front is stymieing growth, as discussed below.

Regarding the changes in China, the government's focus has been on combating corruption, rebalancing the economy away from heavy industries and boosting private sector participation. There has also been a drive over recent months to control financial risks, in the wake of an astronomical increase in debt levels. That said, the reform drive has been somewhat stop-start, with Beijing having shown a reluctance to let the economy slow down significantly. Nevertheless, several key changes have taken place, including: the reduction (albeit moderate) of excess capacity at coal and steel companies; various tightening measures for the housing market; tax cuts for businesses and consumers; and a plan for moving towards mixed ownership structures at state-owned enterprises.

In India, the drive for reform was galvanised in 2014 when Prime Minister Narendra Modi and his Bharatiya Janata Party came to power. Although the party has encountered some hurdles in the implementation of its policies, strong progress has nevertheless been made. The most notable reforms include: the opening up of 15 sectors to foreign investors; the enhancement of bankruptcy laws; increased access to bank accounts; incentives for renewable energy investment; and the introduction of a nationwide goods and services tax in July 2017.

China And India Dominate Top 20 Industry Opportunities
Industry Risk/Reward Scores For BRICS Top 20 Industries
Note: Scores assigned according to BMI's Industry Risk/Reward Index. Scores out of 100, with 100 representing the best score. Source: BMI

These reforms have helped to create an attractive balance of rewards versus risks across a number of industries in China and India. Indeed, China and India collectively dominate the top 20 industry opportunities in the BRICS, as judged by our proprietary Industry Risk/Reward Index. Brazil has an equal number of opportunities (i.e. 4) as India in the BRICS top 20, but the attractiveness is largely due to the sheer size of the market, as opposed to favourable growth opportunities.

Commodity Exporters Struggle To Recover (Brazil, Russia, South Africa)

While the governments of China and India have been pushing ahead with structural economic reforms, the authorities in Brazil, Russia and South Africa have generally been slow to make such changes. Broadly speaking, reforms were neglected during the commodity boom years when growth was buoyant, investment was surging and commodity revenues were streaming in. As a consequence, the three economies have been left with various structural weaknesses including wide fiscal deficits, inflexible labour markets and excessive government footprints in the economy - all of which deter investment and therefore weigh on growth. These shortcomings are being tackled to a degree, but things are moving slowly. For instance, pension reforms have been watered down in Brazil, and Russia's privatisation drive has been stop-start.

Commodity Prices Not Returning To Previous Highs
Commodity Prices Rebased, 2000 = 100
Source: BMI

Economic growth in Brazil, Russia and South Africa will also be capped by 'lower for longer' commodity prices. We expect prices to rise only gradually over the coming years, and we do not foresee a return to the highs posted over 2011-2012, within the next five years at least. This being the case, commodity-dependent economies will have to adjust to permanently subdued commodity revenues, not least via tighter control over fiscal spending. Furthermore, while investment into commodity-related projects is recovering from 2015 lows, it will be less forthcoming than it was during the boom years.

Policy Uncertainty Weighs On Investment (Brazil, South Africa)

Weak investment will be a particularly pertinent theme for Brazil and South Africa, where we expect policy uncertainty to keep investors on the sidelines. In both countries, the government is struggling to pass reforms and there are important elections coming up for which it is difficult to predict the outcome, clouding the outlook for policy.

In Brazil, President Michel Temer has managed to survive a slew of corruption allegations, but he faces a weakened mandate as a consequence. We expect that unpopular reforms will need to be watered down in order to pass through parliament. Perhaps most critically, pension reforms, which are needed to put the budget on a sustainable trajectory, are likely to be scaled back. Looking beyond this year, Brazil faces general elections in October 2018. We believe that these polls will mark a turning point in Brazil's policy direction. President Temer has oriented the government towards a broad agenda of liberalising reforms. Our core scenario is that this policy direction will largely be maintained and modest reforms will ensue, but the outlook is highly uncertain at this stage (see ' 2018 Election Initial Thoughts: Corruption Critical To Outlook ' , August 22).

The election coming up in South Africa is more immediate. It will take place in December 2017, when the ruling African National Congress (ANC) meets to vote in a new leader. In the run-up, we expect party infighting to stymie policymaking. In particular, the 'traditionalist' and 'reformist' camps will vie for power, resulting in little being done to tackle South Africa's structural weaknesses which include a highly unionised labour market and inefficient state-owned enterprises. Moreover, we believe that even if the reformist wing's preferred candidate for the ANC leadership, Cyril Ramaphosa, wins the vote, there will not be substantive changes to policy. If elected, Ramaphosa would likely struggle to push market-friendly reforms through parliament due to weak appetite for such changes among the traditionalist wing of the party.

BRICS - Real GDP Growth, %
Geography 2015 2016 2017f 2018f 2019f 2020f 2021f
f = BMI forecast. Source: National Sources/BMI
Brazil -3.8 -3.6 0.4 1.7 2.0 1.9 1.7
China 6.9 6.7 6.6 6.3 6.0 5.7 5.4
India 8.0 7.1 6.9 6.7 6.6 6.5 6.5
Russia -2.8 -0.2 1.5 1.6 1.7 1.7 1.7
South Africa 1.3 0.3 0.7 1.3 2.0 2.0 2.2