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More Economic Trouble For The BRICS Ahead Part 2

download (70)The only nation in the BRICS that has a rising economy at this time is India. Although China is still growing, it is doing so at a much lower rate. Both statistics of GDP (Gross Domestic Product) as reported by their governments, have been called into question by numerous analysts.

The other three nations that comprise the BRICS are Brazil, Russia and South Africa. There are all experiencing tremendous economic and financial disruptions at this time, that has totally derailed growth.

Mumbai, Maharashtra is the financial capital of the Republic of India

Mumbai, Maharashtra is the financial capital of the Republic of India

India ranking the 7th largest global economy in nominal GDP, grew an estimated 7.5% in 2015. This surpassed the reported rate of 6.9% listed for China. It was the first time this has happened since 1999.

Growth slowed to 7.3% in the last quarter of the year, but it is the only economy within BRICS that is doing better than expected. The government is already forecasting an even higher rate of growth during the first part of 2016.

India is a big net importer of oil, so the country has benefited enormously from the dramatic decline in crude prices. Nearly 75% of total output is derived from the manufacturing sector. Inflation remains relatively low at 6%.

GDP of India has risen rapidly since 1991.

GDP of India has risen rapidly since 1991.

There are some challenges facing Asia’s 3rd largest economy. Exports have weakened in the slowing world economy. Manufactured goods for the export market declined by 8% from April to November in 2015.

Output measured by railway freight, has dipped somewhat as well. There is lower production in cement and overall investment is slackening. Data in the all important agricultural sector, is also indicating a contraction.

Prime Minister Narendra Modi continues to tout his country as a good place to make an investment. However despite the flourish of activity in attempting to make India more investment friendly, little has really changed.

Reforms that have been proposed still languish in the legislature. The corrupt and inefficient bureaucracy, continues to stifle innovation and business investment.

Narendra Modi, Prime Minister of India

Narendra Modi,
Prime Minister of India

Modi in power for almost 2 years, has promised to modernize India. He is trying to focus on boosting infrastructure and manufacturing. It is not easy when 1 million new job seekers, enter the market every month. Yet, official unemployment remains low at 3.6%.

The budget deficit at 3.9% of GDP last year, is supposed to be reduced to 3.5% in 2016. There is increasing pressure to abandon this idea, in the hope that the extra stimulus will give the economy a further boost. Meanwhile, progress in consumer subsidies reform has been slow. Public debt is at 65% of GDP.

The GDP contribution of various sectors of Indian economy have evolved between 1951 to 2013, as its economy has diversified and developed.

The GDP contribution of various sectors of Indian economy have evolved between 1951 to 2013, as its economy has diversified and developed.

The average tariff rate for India is 7%. Other barriers also impede the flow of goods and services. Foreign investment in many sectors of the economy is capped.

The financial sector is dominated by the government, which seriously hampers growth in the free market. About 10% of assets owned by these institutions are troubled, in that they are not solvent.

Although there is no question the economy in India is expanding, there is some doubts raised according to the official figures. A little more than a year ago, the Indian government decided to revise the way it calculates GDP. A number of analysts feel that growth is actually 2% lower than reported.

Despite the skepticism, India remains a contrary story for emerging markets in general.

China has been dealing with market turmoil ever since last August, when their major composite in Shanghai dropped 8.5% in one day. It was the worst session in eight years. Since then, the Chinese leadership has been struggling with a number of issues that threaten to derail the higher rates of growth, that have been a feature of the economy for 25 years.

China and other major developing economies by GDP per capita at purchasing-power parity, 1990-2013. The rapid economic growth of China (red) is readily apparent.

China and other major developing economies by GDP per capita at purchasing-power parity, 1990-2013. The rapid economic growth of China (red) is readily apparent.

What happens to the Chinese economy matters enormously, given that it has become the 2nd largest globally. Growth has now slowed to just 6.9% according to recent statistics, but many experts doubt the veracity of Chinese official reports and assume a far lower number.

Industrial output slowed to 6.1% in 2015, compared to 8.2% in 2014. The rate dropped to just 5.9% year on year in December.

Although is is true that as a proportion domestic wealth invested in the markets is just a small part of the total, it is an indicator that the economy at large is slowing down rapidly. The consistent government manipulation of equities and the economy at large, is at last showing signs of strain.

Three Gorges Dam, huge hydroelectric project.

Three Gorges Dam, huge hydroelectric project.

The overheated Chinese real estate sector is but another example of this. Huge investments were made in private and commercial projects, that now threaten the entire market.

The government has yet to fully deal with the huge amount of toxic debt, that is the result of loans made to state enterprises and local governments. These were mostly contracted during a spending boom, that ended just a few years ago.

A further complication is that many of these real estate developers have borrowed money that was denominated using American dollars. With the yuan dropping in valuation and USD (United States Dollar) strengthening, many of them are now caught in a debt trap.

China is also dealing with a growing glut in goods, that no longer have buyers both at home and abroad. This has resulted in growing layoffs in manufacturing. It is little wonder that consumer confidence in the economy, is now at a record low.

Individual consumption has been a major driver of growth within China over the last two years, growing by 11% in 2015 alone. However, this source of growth may also now begin to slow down.

China Railway HXD1B Manufacturing Company

China Railway HXD1B Manufacturing Company

Chinese wages are continuing their rise, but at a slower rate. Growth in disposal income increased by 7.4% last year. It explains the rise in consumer spending. Wage growth will most certainly impact manufacturing, as more labor intensive industries begin to shift operations elsewhere.

Vietnam would be one of the countries in East Asia, which will benefit from this development.

Surprisingly, wealth disparity within China is expanding despite government propaganda. It now is at one of the highest levels world-wide.

Growth in the service sector also declined in the last quarter in 2015. The rate dipped from 8.65% in the 3rd quarter to the present 8.2% level. The 6.8% growth in China’s fixed asset investment was the lowest on record at the end of 2015, since the beginning of modernization effort.

Xi Jinping, President of China

Xi Jinping, President of China

The government has attempted various measures to help the economy to grow faster again. Interest rates were cut six times last year and reserve requirements were lowered considerably. One can only expect this to continue, along with additional stimulus spending on infrastructure.

This kind of activity does put more pressure on the yuan, which has been declining in value. Although it helps Chinese exports, it increases prices over time. The government devalued the currency by 3% last year. Then when it dropped still further, there was an large intervention to stop it. At the beginning of 2016, it began to descend again. At first the government permitted this action, then intervened heavily once again, to arrest a further dip.

This kind of currency manipulation confuses investors and leads to further market instability. It also begins a flight of capital from China to more financially stable parts of the world, like the United States. The Chinese government announced last month already, that there had been a $99.5 billion USD foreign currency holdings drop. It brings the total exchange reserves down to the equivalent of $3.23 trillion USD, which is the lowest level since 2012.

Coal mining in Inner Mongolia

Coal mining in Inner Mongolia

The government has allowed another problem in the economy to continue because of issues concerning rising unemployment. This has to do with what are known as zombie corporations. These are state run enterprises, that are essentially bankrupt.

There are numerous such firms throughout China and in various sectors of the economy. This is especially true in resource extraction, mining and heavy industry. If these are actually shut down, the result will be massive layoffs.

These newly unemployed people will be coming on the job market just as hundreds of thousands of soldiers are being demobilized, with the present ongoing restructuring and downsizing of the Chinese military. It is therefore far more likely, that the government will keep the state companies operational, whether they turn a profit or not.

With bilateral trade exceeding US$38.6 billion, China is India's largest trading partner.[170] Shown here is a Chinese container ship unloading its cargo at Jawaharlal Nehru Port, Navi Mumbai, India.

With bilateral trade exceeding US$38.6 billion, China is India’s largest trading partner.[170] Shown here is a Chinese container ship unloading its cargo at Jawaharlal Nehru Port, Navi Mumbai, India.

China is also dealing with an enormous demographic problem, created by the soon to be abandoned population control policy (one child per married couple).

One can only imagine that the economic picture is most likely far worse, since it is in the interest of the communist government to put the best possible spin on any disturbing economic news. This is only possible through the government control of media and various levels of power throughout the society.

South Africa was the most developed and prosperous country on the continent. It still can boast in having the most advanced marketplace in Africa. However, the country had embarked on a number of unwise economic decisions, that have brought ruin upon this well situated nation.

There already has been a plunge in their domestic currency and now a strong likelihood that Standard & Poor will downgrade the sovereign rating of the country to junk status in June. Economic growth continues to slow. The forecast for 2016 is a mere 0.7% to 0.8%. The country narrowly escaped recession last year.

Johannesburg, the economic capital of South Africa

Johannesburg, the economic capital of South Africa

South Africa is facing higher debt levels, consumer price increases and rising interest rates this year. Unemployment is now in excess of 25% and inflation is running over 5%. According to the World Bank, South Africans were the biggest borrowers in the world in 2014 and it is assumed that they maintained this status for 2015.

A combination of issues brought this reality into existence. It includes a general slowing global economy, especially China. This in turn, has reduced demand for numerous commodities. South Africa was able to build a nation on the sale of precious and industrial metals. The over reliance on this resource, has prevented the country from enacting some needed economic reforms.

Farmers in South Africa

Farmers in South Africa

The failure of structural change and political mismanagement, has left the country ill prepared for the present difficult world situation.

China has been the largest consumer of South African raw materials by far. The recent devaluations of the yuan have flooded the domestic market with Chinese goods, further impacting an already negative balance of trade. It has also caused problems with national manufacturers.

As South Africa has watched the balance of payments go further into the red, it is having a dramatic impact on rand. The South African currency has already plunged 30% against the American dollar since the beginning of 2015.

Canal Walk shopping centre in Cape Town

Canal Walk Shopping Center in Cape Town

A further complication is a further cooling of foreign investment in the country. This is particularly the case with Chinese investment. It has been the major contributor towards more advanced infrastructure projects not only in South Africa, but around the continent.

The internal situation of the country has not been conducive to growth either. The past inequality of the society, has resulted in a pervasive effect on the the entire economy. There exists a proportionally small middle and upper class in relation to the population at large. This provides a very narrow tax base in which to finance normal government operations.

Some pundits place the blame for this on the legacy of apartheid. Still others feel that the government has used this as an excuse and is largely at fault, in not delivering the necessary structural reforms to move the country forward. After all it is argued, apartheid officially ended in 1994.

Premier Diamond Mine, Cullinan, Gauteng, South Africa

Premier Diamond Mine, Cullinan, Gauteng, South Africa

What the government clearly is responsible for is the present sorry state of infrastructure. There are severe shortages of electricity in many parts of the country. The toll on industry and factories cannot be underestimated. The use of generators has become common, but it adds to the costs and complications in conducting normal business operations within the country.

The insufficient supply of power for the country, is accompanied by a lack of potable water for the citizenry as well. It has resulted in widespread restrictions, that make everyday living annoying. However, the impact on the larger economy is far worse.

It also has contributed to the increase in emigration of the very people, the country desperately needs to keep. That is the well trained or highly skilled professional class.

An additional hindrance to the South African economy, is the role unions are playing in the all important mining industry. The past prosperity of this sector was based on a supply of abundant and cheap labor. These workers are now well organized and have resisted further mechanization of the mines, because it would result in job losses. This makes South African production inefficient and overly expensive.

South Africa mined gold production,

South Africa mined gold production

As foreign investment is already declining along with demand, it is placing extraction industries throughout South Africa at a competitive disadvantage. The present government is reluctant to deal with this reality, because of the political power of the labor unions. They would rather wait for the price of commodities to rise instead.

In the meantime, the situation will soon lead to decreasing mineral production for the entire country.

Given the present circumstances, it is unlikely that South Africa will be able to move on a major reform agenda. The political constraints toward major structural reform are tremendous and almost overwhelming. It would have been far easier to achieve in better economic times. Now such a policy is almost untenable and requires leadership of exceptional courage.

Perhaps the present difficulties being experienced by the BRICS nations as a whole, will finally usher in a new era of cooperation and comprehensive reform. It will need to take place in both the economic and political arenas. Sometimes it is necessary that options become far more limited, in order to force change.

Given the history and past performance of these nations, it allows one to some optimism. However it must be tempered with the realization, that there are powerful national constraints towards a more rational approach in economic and political development.

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