I WROTE A few years ago in this column about the fundamentally dodgy thinking behind one of the international financial markets’ best-known acronyms: BRIC. The term was coined in 2001 by Jim O’Neill, former chief economist of Goldman Sachs and until a few years ago chairman of its asset management division. It was intended to demonstrate the devolution of global economic hegemony away from the developed economies and towards the emerging markets and their most successful and bulkiest participants: Brazil, Russia, India and China.
The former Mr O’Neill is now Lord O’Neill of Gatley (an area of Manchester from which he hails), having been elevated to that title by David Cameron in May, around the same time he was elevated to government as Commercial Secretary to the Treasury. Lucky Jim.
He wasn’t so lucky on the BRICs, however, since the term that had appeared to capture the economic zeitgeist of the decade preceding the global financial crisis now makes any rational observer wince.
The consignment of the acronym to the realm of irony received its coup de grace last week when Standard and Poor’s downgraded Brazil to junk status, as the country wallows in recession amid a huge government corruption scandal at oil major Petrobras.
In truth, the BRICs phenomenon was built on little more than a commodities boom, fuelled by once-in-a-lifetime demand from China – with the possible exception of India, the essential vowel in the acronym. That should be food for thought, not just for the four members of the cabal. Investors must surely now get the joke that a one-trick pony, economically speaking, never lasts for long.
In truth, the BRICs phenomenon was built on little more than a commodities boom
I HAVE WRITTEN here at length recently about China’s transformation of its economic model together with the recrafting of its debt markets, against which the recent stock market turmoil stands as background noise. But what about India?
Prime Minister Narendra Modi has some urgent work in progress, but even a man with the ambition and iron will that he possesses would concede that when it comes to reforming India it is often India that gets in the way.
Just as the Chinese authorities are coming to realise, Modi understands that the debt capital markets are a core delivery mechanism for economic growth. But the Indian domestic bond markets remain an opaque, fragmented arena and the long-needed disintermediation away from a reliance on bank funding remains just an unticked box on Mr Modi’s bucket list.
The India that gets in the way is the one of entrenched vested interests, bewildering red tape, cosy business relationships and the local diffusion of power to the detriment of central government ambition.
Against this domestic backdrop, it is hardly surprising that India’s largest blue-chip companies have sought recourse to the international debt capital markets where size is available, price discovery is a rational process and funding rates are competitive – even on a post-hedged basis.
The old shibboleth of ever tightening syndicated loan pricing has recently returned in the offshore Indian market, where cash-flush Japanese banks are tightening the screws and forcing domestic banks to play their game or shut up.
They may well shut up, since the sprawling Indian banking system is packed with non-performing loans, to the extent that many Indian banks are turning to collateralised lending in a bid to mitigate credit risk on their bruised balance sheets.
The consolidation of India’s banking industry and the recapitalisation of its banks are at the top of Mr Modi’s priorities, and this is conceivably a more realistic ambition than, say, reforming the land acquisition process that is vital if India’s infrastructure build-out is to become reality.
From aiming to place the process in the hands of central government, Mr Modi’s coalition recently watered down the proposals and devolved them to local government level.
THAT WAS A demonstration of how challenging it is to attempt reform in India, to balance government ambition with local needs. But the truth is that if Mr Modi fails to deliver on infrastructure, his tenure will have been deemed a failure. The bond market may yet come to his rescue as it seems there is demand among local and international investors for Indian project bonds and a growing pipeline for the product.
It’s obvious to contrast the game of three-dimensional chess an Indian premier must win to get things done with China’s command economy, where all China’s top leaders need to do to initiate an infrastructure project is, as it were, to push a button.
But given that he lacks this luxury of execution, Mr Modi must conscript multilateral lenders such as the Asian Development Bank to structure public-private partnerships or credit wraps if he is to achieve his Indian infrastructure dream.
I wonder what crosses Lord O’Neill’s mind as he contemplates the state of affairs in Brazil, Russia, India and China in his ermine-trimmed robes. He probably thinks the BRIC acronym he coined was appropriate given the state of affairs at the time. I wish him well at his new job in Her Majesty’s Treasury. One thing’s for sure: he won’t find work as a futurologist if that gig doesn’t work out.
