Thursday, 5 February 2009

S&P Sees China as Best Positioned BRIC Against Current Crisis. It Fails to Say Which is the Worst Prepared Though ...

Wen Jiabao, the Chinese premier, has a hard
task ahead of himself. First, creating dozens of millions of jobs a year
and averting social unrest; second, managing a tough
balancing act in trade and currency policies

Standard and Poor's issued yesterday an interesting report on the financial and economic health of BRIC countries (Brazil, Russia, India and China.) The term, as some of you might know, was coined by former Goldman Sachs & Co. economists to discriminate some countries with outstanding output and financial potential from other emerging markets countries. In the report, called "BRIC By Name, BRIC By Nature?", S&P economist Frank Gill basically tells us that financial strength remains the most important variable when it comes to forecasting what is to happen with these nations. This report sounds to me like they refuse to engage with something more far-reaching than that, though.

Says Gill: "For various reasons -- not least its strong public finances, relatively less exposed financial system, low levels of private sector leverage, and potential to raise consumption's share in gross domestic product, -- we believe that of all four BRICs, China is probably best positioned to find endogenous solutions -- in particular fiscal stimulus -- to withstand an externally driven crisis.´´ Nevertheless, S&P says that without protracted stimulus, China's economy could potentially suffer a severe shock, which could be accompanied by social pressures with political repercussions. ''Recent announcements from Prime Minister Wen Jiabao suggest a strong understanding of these risks and a willingness to access China's considerable assortment of domestic tools to steer the economy through the external crisis,´´ says Gill.

The report, at least the presentation that I got, doesn't mention anything about the current exchange system that is reason to most of China's competitive advantage to the world. In recent weeks, U.S. Treasury Secretary Tim Geithner called the Chinese ''manipulators´´ of their own currency. Surely, some of the analysis should have focused on S&P's view on how the country was to continue weakening its currency artificially to promote exports. For India, the challenge is being able to consolidate public finances in order to reduce its debt burden -- a comment that looks extremely thin on my humble opinion.

Let's say that S&P's concerns focus most on Russia's general picture and Brazil's fiscal inflexibility. Gill says of Russia: "Russia, due to the collapse in its terms of trade, the falloff in financial account inflows, the distress in its banking system, and the absence of excess capacity on the supply side, has access to fewer endogenous cures to the external gloom.´´ And adds: ''although amid all the current difficulties, the Russian Federation can still boast some important ratings strengths, in particular relatively low levels of general government debt.´´ And while China and India stand to gain from falling prices of raw materials, which should keep them competitive relative to other nations, Russia and Brazil are regarded as net losers from lower energy, metals, and agriculture prices.

The investment boom in these two countries has been closely correlated with commodity price increases (something that President Lula tacitly refuses to admit) ''and hence has been interrupted by recent commodity price declines,´´ says Gill. Furthermore, second-round effects of declining terms of trade on growth and public finances in both Russia and Brazil will be similarly adverse.

And a bit more about Russia. ''Due to its oil dependency and the legacy of its three-year domestic credit boom, we see Russian imbalances as far more glaring, although this susceptibility is, in our view, largely offset by Russia's superior public finances,´´ S&P said. Even these, however, may well suffer between 2009 and 2011 as a portion of the Russian Federation's sovereign contingent liabilities becomes explicit and as a contracting economy drives the general government budget into deficit for the first time in over a decade.

Finally, Brazil. While ''imbalances still may not be material, the country in our view nevertheless remains vulnerable to the volatility of the commodity and credit cycles.´´ The Lula government has understood the situation pretty well, and yes, it has been active trying to fight the impact of the crisis -- but, then we have to ask ourselves, are the means by which it is fighting this crisis good for the country on a long-term basis? Ohh .. sorry, that was my comment, not Gill's. Anyways, let's continue. So, in the analysis of S&P, investors should remain attentive, not in alert, over the worsening of Brazilian imbalances. I think that is quite indulgent to a country that is using this crisis as a way to change the rules of the game for the working of the private economy and investment.

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