In some financial circles, especially those macro traders open to a good conspiracy theory, the supposed strategy of the U.S. to “kill the BRICS” hasn’t worked out. In fact, despite sanctions and economic downturns and unheard of corruption scandals, the BRICS have money in the bank and the International Monetary Fund at bay. Meanwhile, European banks are hanging on for dear life, with the IMF saying in June that Deutsche Bank was the biggest single risk to the region’s financial system.
You won’t hear that in Brazil. Itau and even government owned Banco do Brasil is not going to bring the country down. (It has its own corrupt politicians to do that.) Russia has shuttered a few mid-cap banks over the last two years and is burning through one of its sovereign wealth funds, but like Brazil it still has over $320 billion sitting in its core central bank currency reserve fund.
China is slowing, but still growing. India is a stand-out. Policy implementation is slow as ever, but there is not political crisis or economic crisis in the works, nor on the horizon.
In South Africa, which hasn’t touched an IMF loan since 1999, the economy is actually growing. It’s not great. Incomes are in decline. But it’s better than Brazil, Spain and even Japan.
The BRICS, once heralded as drivers of global growth, are all hanging on for dear life. Their counterparts in the U.S. and Europe, meanwhile, are tethered to the whims of their respective central banks for life support. And while there is talk of a recession in Europe or even in the U.S., Brazil and Russia are expected to see the light at the end of their recessionary tunnel by year’s end.
Markets are pricing in crisis-mode, however. On the basis of the JP Morgan Emerging Markets Currency Index alone, investors perceive the big emerging markets as still being in the midst of a crisis, one that is more severe in fact than any they have undergone in the past—including the various EM-driven crises of the 1990s and early 2000s, and even the more recent global financial crisis. The Index is roughly 27% below 2009 levels.
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The BRICS are in a bad way, but they have learned from past mistakes. Until the IMF comes to town in Brazil, the government is trusted to be in control of its debt burden. Russia, meanwhile, is consistently conservative. It de-pegged the ruble from the dollar in 2014, helping it manage the fall in oil prices. When oil prices fell, the ruble fell even deeper, helping Russian oil companies maintain their markets.
Even China has moved to a more flexible exchange rate, widening the trading band for its currency in August 2015.
They “have learned the lessons of previous crises, and leveraged them to put themselves in a much stronger position to successfully weather the latest set of shocks,” says Michael Hasenstab, a fund manager for Franklin Templeton.
One reason why the BRICS have not yet required a bailout: dollar denominated debt. They’re no longer drowning in it.
The financial crises in these countries have all been based on currency, weak local banking and sovereign debt priced in dollars or euros. The most severe crises typically involve more than one of these causes. This explains why the BRICS boosted their levels of foreign exchange reserves after the last crisis in the early 2000s, and joined forces between their central banks to provide financial support when needed.
Hasenstab says in a 32 page report released last week that the most important step the big emerging markets have taken to reduce their vulnerability to crises, both foreign and domestic, is the deepening of their own financial markets. That means they don’t have to rush to Citibank for funding anymore, unless its the home-grown subsidiary pricing its loans in the local currency.
The development of a reliable domestic investor base has benefited from the rise of a broad middle class. This is especially true in China and less so in Russia and India. The total assets held by domestic insurers and pension funds in emerging markets, including the BRICS, have swelled from just $2.3 trillion in 2005 to around $6 trillion in 2013, boosted by the expansion of the insurance sector in China and by pension funds in Brazil and Mexico.
For the BRICS, a transition toward more balanced funding has improved financial resilience and made them harder to force into the loving arms of the IMF.
Domestic institutional investors can be a stabilizing force when asset prices collapse to levels that are clearly out of line with fundamentals, Hasenstab writes. In the past, the lack of a strong domestic investor base magnified the consequences of financial volatility. When the West was out, countries like Brazil, South Africa and India, in particular, were out of luck.
The borrowing practices of these governments have also improved. According to the Bank for International Settlements, governments have raised their reliance on funding in local markets, with the share of international loans falling from roughly 40% in 1997 to a mere 8% in 2014, while the share of foreign holdings of local government debt has increased to 25%, according to JP Morgan.
The increased importance devoted to attracting foreign direct investment in long term projects like energy and infrastructure instead of speculative investments has helped curb the risk of sudden capital outflows. It’s much easier to sell out of Brazilian bonds, than it is to sell out of an entire Brazilian hotel chain.
China remains particularly hard to bring down. It has been butting heads more against the U.S. over the South China Sea, but their economy is so deeply tied to the U.S. that a weak China also ends up being bad for American companies, especially those that are just starting to export there.
China has been a stalwart within the BRICS. And while the political ties between the five countries are not as tight as those between the U.S. and European Union, they have proven that they can take their lumps when up against the ropes.
Over the last few years, the five countries created the National Development Bank, which was first seen as a challenge to the World Bank and IMF. Then China launched an even bigger project, the Asian Infrastructure Investment Bank. It received immediate criticism by the U.S. Washington has abstained from becoming a member of the bank, while the U.K., Washington’s biggest ally in Europe, is a member.
The BRICS have been seen as an alternative to a unipolar, dollar-centric world. But its latest development banks are all dollar denominated, for now. And while their economies are in varying degrees of crises, they have shown that the last decade of keeping clear of the IMF remains a policy none are willing to reverse. Until the IMF comes crashing into Brasilia or J-Berg, the BRICS are alive and will manage to grow in the current low-growth environment everyone is facing.
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