A gear-shift by U.S. Federal Reserve and the resultant dollar surge could force BRICS countries to apply a ‘sudden stop’.
Ambrose Evans-Pritchard in his comments posted in ‘The Telegraph’ feels the flow of over $8 trillion capital in to emerging markets since the Lehman crisis has largely sputtered out in some of the BRICS countries including Brazil, Russia and South Africa.
Federal Reserve Chairman Ben S. Bernanke defended Wednesday the central bank’s record stimulus program indicating that ending it prematurely would endanger a recovery hampered by high unemployment and government spending cuts.
Once funding for emerging markets dries up, a ‘sudden stop’ can be anticipated forcing investors to exit, feels the former IMF official Stephen Jen.
According to the former IMF official, before 2007 the money was ‘pulled in’ because of a strong growth story, while recently money has been ‘pushed out’ of the Western markets through QE announcements in the U.S. and Britain.
The cumulative inflow of capital into several developing countries is quite significant. For instance, the cumulative inflow of capital has been 60pc of GDP in Lebanon, 58pc in Bulgaria, 56pc in Hungary, 50pc in Ukraine, 48pc in Poland, 42pc in Chile, 39pc in Romania, 32pc in Malaysia, 28pc in Thailand and 26pc in Turkey. But IMF feels the flows are ample though not alarming. However IMF warned that global market sentiment could change in the event of unforeseen circumstances.
For those taking contrarian view, all the above might not sound pessimistic. With 12 pc fall in the MSCI Index of emerging markets since early 2011, this could be the right time for bargain-hunters. Alluding to this view, Bank of America indicated that the sector normally beats the S&P 500 and Eurostoxx whenever bearish sentiment prevails.
Many of the BRICS countries have already started experiencing pressure. South Africa’s current account deficit is high at 6 pc of GDP, while Brazil’s manufacturing output is presently lower than what it was in 2008. India too is facing challenges in reining in its current account deficit, which stands at 6.7 percent of its GDP now.
Russia continues to face challenges to maintain its leadership position in global energy supply.
China has a dominant share among the BRICS countries:
China, which has a dominant share among the BRICS countries, has run into diminishing returns, after increasing its credit from $9 trillion to $23 trillion in just four years. Thus China is constrained to settle for a pedestrian growth, that too at the mercy of FED.
China’s challenge comes at a time when its trade surplus starts dwindling while the U.S. firms bringing back plant to the U.S. soil for cheaper power and enhanced labor productivity.
Despite Chinese stock market posting negative returns in real terms since 2008, foreign players have shoveled $8 trillion into BRICS countries.
Ambrose Evans-Pritchard concludes that the emerging market exuberance has been seen in the 19th and 20th Centuries and one shouldn’t be shocked if history is repeated.