From BRIC to BIC…or even IC?

BRIC leaders meeting last year.  Source:

The Economist published an article this week suggesting that Russia’s slide into recession this year – due to lower oil prices, capital flight, weak banks and greater state involvement in the economy — could mean the fabled BRICs will become BICs. Of the four BRICs that made it into Goldman’s arbitrary moniker for major emerging market economies, Fitch Ratings forecasts only China and India will grow this year. Does that mean the BRICs should actually be the ICs? Does Brazil’s shrinking economy also knock Latin America’s largest country out of this select group? Somehow IC doesn’t sound as good as BRIC. Before the global financial crisis, some had said that Brazil had hit a BRIC wall, due to its much worse economic growth performance. I guess that would have been RIC, right?

Fitch Ratings forecasts Earth’s economy will contract 2.7% this year, driven by a nearly-unprecedented shrinkage of the major advanced economies by 3.8%, much worse than the zero growth of the 1975 and 1982 global recessions. Russia is likely to contract by about 3%, Brazil by a little over 1%, while China and India expand by 5-6% each (slow for these countries). Russia’s contraction is driven by its dependence on energy exports, the price of which has fallen markedly since highs last year. However, should the recent push upward in the price of a barrel of oil to nearly $70 persist, Russia’s contraction this year could be more muted.

As noted, Russia is also buffeted by weak banks, capital flight and the heavy unmet external financing needs of the private sector. In addition, as The Economist points out in an article likening Putin’s Russia to the Ottoman Empire, the greater intrusion of the state in the economy and the corporatist corruption of Putin and his men have stymied, though not uprooted, private entrepreneurship in Russia.

The comparison between Russia and Brazil is interesting. Fitch rates Russia’s sovereign debt “BBB” with a Negative Outlook, and Brazil a notch below at “BBB-” with a Stable Outlook (the Outlook reflects the likely direction of the rating within two years). India is also rated “BBB-” with a Stable Outlook. And China, in a class by itself with its $1.8 trillion in reserves – perhaps Goldman’s next appellation should simply be C – is rated “A+” with a Stable Outlook.

But as I said in a previous note about Moody’s, ratings are notoriously sticky. Brazil is looking better than Russia these days. Its economy is more market-oriented and better structured. Its exports are much more diversified. Its domestic market is stronger, as are its banks. Its only negatives vis-à-vis Russia are: its higher government debt, though its deficits are lower than Russia’s because the latter relies on volatile oil to balance its books; and, Russia’s stronger external balance sheet, i.e. excess of foreign exchange reserves over money it owes foreigners. However, Brazil’s balance between external assets and liabilities is near zero — pretty darn good — so I’m not sure Russia is so far ahead on this front. India likewise has a heavy government debt burden and fiscal deficits (both larger than Brazil’s).

India’s and Brazil’s fiscal woes emanate out of their tradition of coalition politics, a dynamic described in an earlier post. India now has the potential to improve its fiscal performance, given the strength of the Congress Party after last month’s elections. Congress should require less pork to distribute to keep its coalition together. India likewise has external assets in excess of liabilities, but not to as great an extent as Russia. Both Brazil and India benefit from a relatively closed economy (at least during a global meltdown) and a strong domestic market. (China’s openness to trade has become a major vulnerability in this crisis.) So perhaps the ratings of both Brazil and India should equalize with or even best Russia’s. Let’s wait and see.

Fitch regularly publishes an interesting report on banking sector risks across the countries it rates. The last one came out May 11, 2009. They assign a letter grade and a number rank based on the health of a country’s banks and vulnerability to shocks. The letter grade (A-E) is an average of the credit quality of the nation’s banks. The number (1-3, 3 being the worst) reflects the vulnerability of the country’s banks to financial shocks from asset prices (including real estate), excessive growth in bank lending, and exchange rate movements. The risk indicators for the famed BRICs are as follows:

Brazil C-3

Russia D-3

India C-2

China D-1

By this measure, India may be the least vulnerable to a banking crisis. China’s score of 1 for financial shocks is good, but may change given the breakneck growth in bank lending of late. China’s banks are fairly weak, given heavy policy lending to state-owned enterprises. Russia’s banks are also weak and prone to shocks. Fitch’s banking sector indicators were always much better in the advanced industrialized countries than in emerging markets in the past. In late 2006, the US and UK were both B-2, and now they’re both C-3, same as Brazil. Some powers rise and some powers fall.  My email is


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