Lessening the Impact on the BRIC Countries of A US Recession

The slowdown in the US economy led to the US Dollar depreciating against all four BRIC currencies in the fourth quarter of 2007.

According to a weekly survey by Brazil’s central bank which tracks the opinions of 100 analysts and economists from the country’s banks and brokerages, the Brazilian Real (BRL) should strengthen and reach BRL 1.80 against the US Dollar by the end of 2008, due to efforts to shield the country from inflation and the US slowdown. 

The Russian Ruble was the only BRIC currency that declined temporarily against the US Dollar in January 2008 after the US Federal Reserve cut interest rates. By the end of January, Russia’s Central Bank decided to maintain the exchange rate at 24.7 Rubles to the US Dollar, to control inflation, according to an article published in February in Kommersant, Russia’s online daily.

The Indian Rupee continued to appreciate against the US Dollar in January 2008. The Directorate General of Foreign Trade in India noted that the appreciation led to a decline in exports of industries such as handicrafts, textiles, and processed food. Exporters are now pushing the government to intervene and reduce the exchange rate.

The Chinese Yuan has appreciated by 13% against the US Dollar since China de-pegged it in July 2005. Ha Jiming, chief economist at China International Capital Corp. Ltd., said that People’s Bank of China is considering changing its monetary policies to control the currency appreciation.

Domestic Investment and Demand  

Offsetting to some degree the vulnerability of BRIC countries to a slowdown in the US economy is strong growth in domestic consumption in each country. India’s commerce and industry minister, Kamal Nath, said in January at the World Economic Forum in Davos that the world is “for the first time facing a US downturn with two other engines of world growth – China and India.” He noted that, while no economy in the world can be fully insulated from a US recession, the impact on countries such as India this time would be limited due to growing domestic demand.

Next week we will explore the growth of consumerism in the BRIC countries, highlighting that:

• from 2004 to 2008, consumer spending increased at a compound annual 19.6% in Brazil, 18.4% in Russia, 13.5% in China, and 9.0% in India, according to Euromonitor International;
• retail revenue accounted for 25.4%, 17.7%, 35.8% and 35.4% of  GDP in Brazil, Russia, India and China in 2007, respectively, according to CIA Factbook; and,
• the 2007 AT Kearney Global Retail Development Index ranked India, Russia and China as the top three destinations, and Brazil 20th, for retail investments across the top 30 global emerging economies.

The likely impact of a US recession on the BRIC economies will remain under debate and close scrutiny for a long time to come.

However, as Dominque Strauss-Kahn, managing director of the International Monetary Fund, noted in February, “The industrial and emerging economies are like two horses yoked together – if one is tired, the other can take up more of the strain for a while. But if one stops in its tracks, neither is going to get very far.”

This article is reproduced with permission from the BRIC+ Digest. The BRIC+ Digest is part of the BRIC+ Program which specialises in providing financial advisers with information about key global emerging markets and their place in portfolios.

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