Tuesday, March 17, 2015

BRICS vs. Fragile Five

BRICS Nations
BRICS acronym is given to 5 major emerging economies of the world - Brazil, Russia, India, China and South Africa, which was formerly known as BRIC (excluding South Africa). In 2010, South Africa is added to the group.

These 5 major emerging economies have the following characteristics in common -

  • developing countries, or newly industrialized countries
  • large and fast-growing economies
  • have significant influence on their regional and global affairs

Some statistics (as of 2014)
  • Combined GDP - USD 16.039 trillion (approx. 20 % of combined GDP of world)
  • Population - approx 3 billion (41.4 % of world population)
  • Combined Forex reserve - USD 4 trillion
  • Land area - more than 1/4th of world land

BRICS summit
Since 2010, BRICS summit is being held annually. Russia will host 7th BRICS summit in July, 2015. 6th BRICS summit was held in Brazil in 2014.

New Development Bank BRICS (NDB BRICS)
In 2014 BRICS summit, member countries came together to form a multilateral development bank as an alternative to World Bank and IMF (which are US-dominated). 

Each member country will have single vote and there will be no Veto power* for the members (In contrast, World Bank assigns votes based on capital share, meaning voting power is proportional to capital!).

Some points regarding NDB BRICS (will start lending in 2016) -
  • Initial Capital - USD 100 billion (China USD 41 billion, Brazil + Russia + India = 3 x USD 18 billion = USD 54 billion, South Africa USD 5 billion)
  • Reserve Currency Pool - USD 100 billion (apart from the initial capital)
  • Headquarter Shanghai, China
  • Regional Center - Johannesburg, South Africa
  • First President - from India
  • First Chairman of the Board of Directors - from Brazil
  • First Chairman of the Board of Governors - from Russia
(Note that each member country got something!)

Fragile Five
In contrast to the 5 major emerging countries (BRICS), Mr. Jim O'Neil, a research analyst from Morgan Stanley, has coined the term 'Fragile Five'. As the name suggests, these are 5 developing countries, which are much dependent on foreign investment (into their economies) to finance their growth ambitions. 

The Fragile Five economies are -
  • Turkey
  • Brazil
  • India
  • South Africa
  • Indonesia

Latest situation of Fragile Five (as of March 2015)
Morgan Stanley had identified the 5 major emerging markets with the most vulnerable currencies
  • India - inflation halved since the end of 2013; Current-Account Deficit (CAD) shrunk; investor friendly policies of PM Shri Narendra Modi; Governor Shri R.Rajan won a legal mandate for RBI to target inflation; Rupee 1 % gained versus Dollar this year, etc.
  • Indonesia - scrapping gasoline subsidies by new President Joko Widodo; target to cut budget deficit to 1.9 % of GDP
According to Morgan Stanley economists, India has completed 85 % of the necessary adjustment, whereas Indonesia has completed 65 %.
Other countries - Turkey 10 %, Brazil 15 % and South Africa barely anything of recommended reforms.

(It seems Fragile Five came down to Fragile Three!)

*Veto power - It gives power to stop changes, or not to adopt them. For an example, in UN Security Council (UNSC), permanent member countries have veto power, meaning if any of them wants to stop any resolution, they can use their veto power.

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