Brics summit more than a talk shop
In the context of Trump’s attacks on the free-trade order, Brics seems much more coherent and represents the best of the emerging-market investable universe
It was never intended to be more than an investment catch phrase — coined by Goldman Sachs Asset Management chair Jim O’Neill — for the rising giants of the world economy.
The poor Third World had already been re-labelled the emerging markets in 1986. Fifteen years later Bric was a kind of emerging markets label for dummies — the names Brazil, Russia, India, China are easy to remember. There was a craze for these acronyms in the early 2000s. Some of these are long forgotten; one is Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey and SA).
At the end of 2010 SA was invited to join the Bric grouping (O’Neill objected), and it was renamed Brics. This provided President Cyril Ramaphosa with all those magnificent photo opportunities last week at the 10th Brics summit in Sandton.
There has not been an international body representing the developing world since the Non-Aligned Movement, which was formed in Bandung, Indonesia, in 1955 and collapsed into irrelevance in the 1980s.
US President Donald Trump’s "America first" approach to trade and foreign relations certainly makes Chinese President Xi Jinping look measured and reasonable.
At the Brics business forum, Xi said: "We are facing a choice between co-operation and confrontation, between opening up and a closed-door policy."
Deloitte emerging markets director Martyn Davies believes Xi is skilfully building a coalition against US trade policy.
In that respect the summit was far more than a talk shop.
Investec Asset Management strategist Michael Power, previously a Brics sceptic, now sees it differently. "I thought Brics was a disparate group with nothing in common. But in the context of Trump’s attacks on multilateral trade policies it has become much more coherent.
"We have a world order around free trade that’s worth protecting."
However, Power says Brics will never be a coherent grouping such as the Group of Seven rich democracies.
Suhail Suleman, co-manager of the Coronation Global Emerging Markets Fund, says Brics covers most of the emerging-markets investable universe.
Brazil and SA have the most in common, with a history of racially tinged inequality and a recent move to democracy, as well as mineral-based wealth. They also have young populations, in contrast with China and Russia. India is much poorer than the other four on a per capita basis, but its economy is vibrant.
The Brics political systems have nothing in common: India, SA and Brazil are democracies; Russia is an authoritarian regime with a democratic fig leaf; and China is an old-school dictatorship.
Not that investors are too concerned — their governance processes are strictly for the boardroom. Templeton Emerging Markets identified a specified demand for a Brics mutual fund, which is 45% invested in China and between 8% and 14% in the other four Brics countries.
Predictably, the big holdings are in internet phenomena Alibaba and Tencent (directly as well as through Naspers). The fund in its top 10 has only two Russian shares (Lukoil and Sberbank), as well as Taiwan Semiconductor — but then that’s part of China.
The Brics presidents make a point of not commenting on each other’s regimes; that isn’t what the organisation is about. It is all about strengthening trade ties and establishing institutions to counteract Western economic powerhouses such as the International Monetary Fund (IMF) and the World Bank.
The 2013 Brics summit in Durban is probably best remembered for the photo session when then SA president Jacob Zuma handed out umbrellas to his counterparts at a wet King Shaka airport.
The Durban summit did not include as many open sessions as were held last week in Sandton, but it resulted in one important decision: to establish the New Development Bank, which eventually should have $100bn of capital to deploy. It is headquartered in Shanghai, with an Indian president, KV Kamath.
Kamath says that by the end of the year the bank will have approved loans of $7.5bn. The first loan to SA was for $180m to Eskom, for a renewable energy transmission project. The second was $200m for the reconstruction of the Durban container terminal.
Another Brics institution is the Contingent Reserve Arrangement, for the provision of protection against global liquidity pressures without having to bow and scrape to the IMF.
Davies says he is glad there was no mention from the podium of the proposed Brics ratings agency, to compete with Standard & Poor’s, Moody’s and Fitch. "It was always an exercise in wishful thinking and fantasy economics."
Davies says the Zuma government argued that the big three were treating the state-owned enterprises unfairly. "It is now clear that in the case of, say, Eskom, they were generous."
Suleman says he hopes to see more soft advantages, such as visa-free travel between Brics countries.
But in many ways the five nations are ready to stand on their own two feet and move the centre of world power south.
Over the past 15 years the contribution of Brics to global exports has increased from 8% to 18%, and imports from 7% to 15%. The grouping has maintained a trade surplus with the rest of the world that peaked at $640bn in 2015. China’s surplus is the most stable; the other four suffered brief shocks in 2008 and 2014.
SA has consistently recorded a trade deficit with the other Brics nations since 2001. Exports peaked at $17bn in 2011. Declining metal prices and the rising production costs in SA mining were the main cause of a slip to $10.6bn last year. Manufactured products, which used to account for 41% of SA’s exports to Brics nations, now account for 24%. SA has enjoyed trade surpluses with India and Russia, but only for short periods. It has not had a trade surplus with China this century.
In that context there is certainly enlightened self-interest in Xi’s gifts to Ramaphosa — a total of $14.7bn in investments (it isn’t even two years of trade surplus with SA). It makes sense to support a significant export destination with long-term potential — and China always takes a longer-term view than the West.
Davies points out that since 2003 the other Brics nations have invested $17.8bn in SA (not including funds earmarked last week) and created almost 37,000 jobs in SA. Brazil has been least interested in SA, investing $72m, most of it in the highly niched aerospace and automotive education and training sectors.
Suleman says most Brazilian companies have huge potential in their home market, with 200 million people in an area the size of the US.
Russia has been more interested in SA, investing $466m, but mostly in extraction (of minerals from the ground, not teeth). India has been more generous, investing $5.8bn. With hindsight, perhaps we should not have taken it all so eagerly. As we know, a big chunk of this went into the coal sector and some to media.
It is China that has been keenest on SA, investing $11.9bn — though $6.4bn of this was in a single vast real estate project in Gauteng — but it also invested in the labour-intensive transport and automotive sectors.
Davies says African countries are nervous about China and its motives as an investor, but that country has already made a substantial contribution to East Africa through roads, rail and industrial parks. "It is best to avoid 19th-century terms such as neocolonialism," he says.
Power agrees that there is no need to be suspicious about the Chinese way of doing business; at least it doesn’t impose its political views on other countries. "It takes a more balanced approach now anyway, using more local labour and raw materials."
The Brics acronym could become quite a mouthful if other powers are invited to join. Mexico’s economy is more than four times SA’s, but its future is closely tied to the US. Turkey would be a more willing candidate. It has more than 100 million people, and must be in the queue. Power says Indonesia will be one of the world’s 10 largest economies by 2030, so it, too, would be logical candidate.
Suleman says Brics started as an investment concept, so it would be diluted if illiquid markets such as Indonesia joined the club.
If illiquidity becomes a barrier to joining Brics, it could be decades before Nigeria is admitted, even though it has a larger economy than that of SA.