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Testing Times A US Recession
and the BRIC Economies

By Deirdre Keown
July 29, 2008


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India is also somewhat vulnerable, and will feel the effects of a US downturn, its government predicts. According to its Department of Commerce, about 15% of India’s exports in 2007 were to the US, with exports accounting for 33% of GDP. The US remains India’s largest trading partner. Rajeev Malik, an economist with JPMorgan Chase in Singapore, predicts that if the US enters a recession, India’s growth is likely to slow from the current 9% to 7%.

Russia is the most insulated of the four BRIC economies, with just 3% of its total exports in 2007 going to the US (compared with 16% to Brazil, 19% to India and 21% to China). Russia’s largest trading partner is Germany, a leading customer of Russian natural gas.

“In the long term, this will work to Russia’s disadvantage by isolating the country from the benefits of exposure to the world’s largest economy,” said Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow. However, in the short term, it will cushion the country from a US downturn, he noted.

Foreign Investment   By mid-February 2008, the world’s major banks had lost a total of US$140 billion as a result of the sub-prime credit crisis, according to Forbes.

If defaults spread beyond sub-prime mortgages to other areas, such as a rise in credit card debt and consumer debt, we’ll see outflows of foreign direct investment (FDI) and foreign institutional investment (FII) from the BRIC economies, says prominent economist and former United Nations Under-Secretary-General for economic and social affairs, Nitin Desai.

Even if defaults remain at the same level, US investor sentiment may be dampened, impacting new investment flows into BRIC investment funds.

Andrey Kostin, chairman and CEO of leading Russian bank VTB Bank said in January that he “did not think either Russia’s industrial or financial sectors will be affected – with the exception maybe of the stock price of Russian companies.”  That’s because only 4% of Russia’s FDI is dependent on the US, according to Rosstat, Russia’s statistics bureau. 

Furthermore, Russia’s foreign currency reserves, earned from oil profits, sit at a massive US$478 billion and are now the largest per capita in the world. These  will “play the role of an air bag” for the country, said Finance Minister Aleksei Kudrin speaking in late January at the World Economic Forum in Davos, Switzerland.

Furthermore, it would take a steep fall in crude oil prices to a “now improbable $50 a barrel” to flatten Russia’s growth, according to Julia Tsepliaeva, Merrill’s chief economist for the republics of the former Soviet Union.

China is also optimistic about its ability to weather a US downturn or recession. It expects its 2008 Olympics to continue to drive foreign investment to the country, even after the Olympics finish.

Justin Yifu Lin, the World Bank’s new chief economist and senior vice president, said in February that a US recession will have only a limited impact on China. “China will experience a better economic growth after the Beijing Olympics, as investment, consumption, and exports – the three economic growth drivers – will remain strong.”

The prognosis for Brazil and India is not as optimistic.  According to the India Economic Advisory Council, the slowdown in the US will negatively impact foreign capital inflows, and FII is expected to decline by approximately 12% from US$6.3 billion in October-December 2007 to US$5.5 billion during January- March 2008.

Brazil too expects a hit to the flow of FDI into the country. According to World Bank estimates, FDI currently represents around 1.9% of Brazil’s GDP. The US is Brazil’s main source of foreign capital, and a US downturn is certain to bring a fall in FDI by that country into Brazil.

 


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