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The BRICs are crumbling

Brick-Wall-With-Lights-stock4221-large

by Chris Becker

The potential for an emerging markets crisis rolls on as news this morning that Brazil’s rating and outlook have been cut by S&P on the back of its continuing fiscal crisis on plunging oil and commodity prices.

From Bloomberg:

Brazil’s sovereign rating was cut to junk by Standard & Poor’s, eliminating the investment grade the country enjoyed for seven years, as President Dilma Rousseff’s struggles to shore up fiscal accounts amid a faltering economy.

The country’s rating was reduced one step to BB+, with a negative outlook, S&P said in a statement.

The downgrade puts pressure on the economic team led by Finance Minister Joaquim Levy to win passage of measures that would shore up the country’s fiscal situation by cutting spending or raising taxes. .

“The political challenges Brazil faces have continued to mount,” S&P said in the statement accompanying its decision. “The negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position.”

Brazil’s government said in August it forecasts a fiscal deficit in 2016 of 30.5 billion reais ($7.9 billion), or about 0.5 percent of gross domestic product. That compares with a targeted surplus of 2 percent at the beginning of this year and a revised objective of 0.7 percent announced in July.

Derision of S&Ps role in the GFC aside, the key point is that the major pension and other managed funds cannot buy “junk” rated assets, so this rating could lead to a big dump in Brazilian stocks, bonds and of course the Real which is in terminal decline:

brlusd_fx_price_weekly.02dec10_to_11dec15

The engine of emerging market/BRIC growth is trade with the developed economies, either in commodities or cheap products. The collapse in commodity prices and the return to a deflationary path of demand, including China’s restructuring is causing that engine to choke.

Or as Citi explains, via FT:

“In medical terms, the patient’s condition is chronic, not acute,” said David Lubin, head of emerging market economics at Citi. “EM has a persistent problem that results from two irreversible shocks. One is the end of an era which saw rapid, investment-led growth in China. And, two, the collapse of global trade growth to levels unseen for a generation,” he added.

 In the first half of this year, emerging markets became a net detractor to global trade growth for the first time since 2009, according to data compiled by Oxford Economics, a research firm.

In GDP terms, EM growth is likely to fall to 3.6 per cent this year, its lowest level since 2001 (excluding the GFC). However, the impact on commodity-exporting EM economies is particularly severe, with average GDP growth falling fast toward zero.

“This is not a repeat of the ripples that spread across the world’s financial markets in the late 1990s and into systemic banking failures,” said Neil Shearing, chief emerging markets economist at Capital Economics in New York. “This is a crisis of growth.”

Part of that crisis  is caused by structural problems on the supply side, such as the misallocation of resources in China, persistent low investment in Brazil and Russia, excessive regulation in India and Mexico.

Ratings downgrades do not help at times like this as debt becomes more expensive and asset prices plummet, putting more pressure on emerging market fiscal bottom lines and on corporate balance sheets.

 

Comments

  1. BRICS are crumbling? LOL! Pathetic analysis. S&P is a joke. Remember how they rated those junk bonds that failed AAA that’s right! The USA isn’t a crumbled edifice of corruption, fascist police state and cronyism? What is the current debt (including unfunded liabilities) of the USA? How many are killed by police every year over there? How many US citizens are jailed?

    • I think we have our first Russian funded troll on MB (seriously – not joking). Congrats MB – you are moving up in the world! It must have been the negative Brics headline that reeled them in

      Svetlana dear, I think Vlad Vladimirovich’s minions are meant to choose non-Russian names – just a tip for beginners! As for your technique, it’s a good start, but the ‘what-aboutism’ is a little too obviously Soviet
      https://en.wikipedia.org/wiki/Whataboutism
      http://www.telegraph.co.uk/news/worldnews/europe/russia/11656043/My-life-as-a-pro-Putin-propagandist-in-Russias-secret-troll-factory.html

      Welcome Svetochka, hope that abandoned warehouse on the edge of Piter is warm!

      • Says the guy named VASA.

        And of course the USA does not have the CIA, NSA, or ALPHABET agencies as they are known due to the profligacy.

        On top of this the US has engaged companies like H.P.Garry who specialise in manipulating entire countries via twitter, Facebook etc –

        The US has also been harvesting not just ALL US communications, but global communications – and has been harvesting ALL electronic communications for almost TWO DECADES.

        Seriously – what a turgid little post.

        https://www.youtube.com/watch?v=sfdm78zcv8o

      • It’s actually a retarded post. The CIA actively bribes journalists to write pieces favourable to USA policy agenda, and Vasa over here is linking articles from Wikipedia and the telegraph. You may as well be linking a foreign policy piece about Russia from the Washington Post of NYT where the articles are cleared by the State Department before making it to print.

        I mean why are the Americans so concerned about Russia in Syria? Doesn’t that mean the Russians are actively going to be targeting ISIS, and helping the guy that is actually secular and trying to protect Christians and other minorities? Why would the USA be so against this? Could it be perhaps that they would like to see ISIS topple Assad before they do anything serious to destroy them? The “coalition” manned over a thousand strikes in Kobani to root out IS there, where was this response in other Syrian cities, such as Palmyra?

      • @Vasa — what sort of Troll are YOU ? I for one think that Svetlana’s comments were spot on !
        Who gave you the authority to call others Trolls based on a personal opinion which I support. On that basis I’m a Troll too ? Wanker .

    • @Svetlana – – Spot on +100 –You nailed it .
      “Ratings downgrades do not help at times like this as debt becomes more expensive and asset prices plummet, putting more pressure on emerging market fiscal bottom lines and on corporate balance sheets.”
      S & P ratings are a JOKE ! A bad joke admittedly but a tool used by the USA to nail competitors or anyone the admin doesn’t like. They will be hoping that this affects not just Brazil but indirectly Russia & China -the main target for the downgrade. Does no one remember when S&P a few years go DARED to down grade the USA by a tiny amt compared to what it should have been downgraded. The result was denial & fury -followed up by a corporate fine of hundreds of millions of dollars. A/holes!

      • Conspiracies abound. Imagine that, the US, China and Russia (and potentially others) using their government agencies as levers for advantage…economic, political, social. Pls say it isn’t so! If true, I am simultaneously shocked and appalled.

        What is the world coming too?

  2. Thanks Bertrand.

    Vasa is actually Samoan – it means ‘south’ (Vasapasifika=South Pacific)

    The US is pretty terrible some or most of the time – it is a corrupt and brutal place. I certainly wouldn’t want to live there. What you say is true about US harvesting of comms – also quite true.

    However, and this is where you make your crucial mistake, just because the US is bad does not make Russia, Cuba, Venezuela, Iran, Syria any better… They are all considerably worse. If you would seriously rather live in Russia than Australia, the UK, Germany or the US, you my friend are a lunatic and there is no point arguing with you (I’ve lived in Moscow and St Petersburg, and studied at MGU and SPGU)

    • ‘If you would seriously rather live in Russia than Australia, the UK, Germany or the US, you my friend are a lunatic and there is no point arguing with you (I’ve lived in Moscow and St Petersburg, and studied at MGU and SPGU)”

      I must be utterly crazy for dreaming of life in Jamaica?

    • @Troll Vasa – — (I’ve lived in Moscow and St Petersburg, and studied at MGU and SPGU)
      So now you have come to MB to put out CIA sponsored comments rebutting what your masters object to. SEE — it’s easy to pick a troll.
      Like you said -(seriously – not joking).

  3. Ha – you guys are funny. I’m guessing that Sveta is a proper Russian troll.

    Bertrand 50/50 (strangely unidiomatic English – ‘profligacy’ ‘turgid’).

    JC seems more just like your garden variety ‘Lizard Rockefeller Freemason Bankers control my brain’ type that you get over on zero hedge.

    The point is that ANY paid troll – Corporate or Government – deserves the same contempt (see how popular 3d1k is around here)

    • So like the trolling you are doing now? Who has you on the payroll? I was wondering what that feeling i was having was, and then you go and describe it perfectly for me. It’s contempt. Complete and utter contempt…..

      • Dude, I wish I was on the payroll.

        Not that the ruble is buying much these days. Maybe China is hiring?

        Praise the A shares!

    • Lol – most commentators on this site are either paid trolls or wearing a tin foil hat.. oh wait which one am I???

      • Leading to the obvious question – why do the trolls’ paymasters need to manipulate the tin foil hat wearers? What are they going to do with this army of useful fruit loops?

      • I agree there are a lot of paid trolls here, and I suppose I am the archetypal tinfoil hat guy, because in an very unAustralian way, I keep abreast of climate science. Silly me.

      • @byron,

        Point taken, but it still seems like anyone who is a paid troll here is spending a lot of their time engaging the tin-foil hat wearers, which seems a risky strategy if they’re trying to influence onlookers.