Webcast 019 | Why so gloomy?

In ‘Why so Gloomy” Rebecca Harding argues that key economic trends and global trade has continued to be weak but markets continue to hit new highs. This is because economic fundamentals are not being priced in but policy action to stave off deflation in the Eurozone might yet trigger the market nervousness that creates a strong shift back to emerging markets equities.

Webcast 019 Author  |  Rebecca Harding  |  CEO

Banking on growth?

Why the BRICS bank should have a broader trade remit  |  China’s year-on-year export growth for August was 9.4%. Does this mean it is time to herald a global trade recovery?

The short answer to this question is no: Delta Economics data suggests that month-on-month growth in Chinese exports was just 1.5% and while we expect similar growth in September, we see a sharp fall back in export growth in November. The Chinese export data may suggest that it’s a good month to diversify risk away from global equities and currencies back to emerging markets given additional sanctions against Russia, the reduction of European interest rates further into negative territory and the uncertainties around Sterling ahead of the Scottish Referendum. ¬Overall, however, the annual trend trade growth in Asia is substantially below pre-crisis levels at just 5.2% and it has been a tough year for South-South trade.

The question, then, is will the newly established BRICS bank help? At present, because its remit is infrastructure and economic development in the BRICS countries themselves, it probably won’t. It runs the risk therefore of being simply a counterpart to the IMF but with China as the dominant partner rather than the US. The Delta Economics view is that it will need to expand its scope beyond the BRICS and into trade very quickly if it is going to have an enduring impact on long-term growth globally. At 5.7% and 4.3% in 2014, we are forecasting substantially flatter export growth for Asia and Latin America, respectively, than was achieved during the peak of the post-crisis recovery. This suggests that there is a real need to recapture some of the energy that drove the rapid growth both before the crisis and in 2010 and 2011.

There are several reasons why it is important that the BRICS bank takes on a remit for all emerging economies. First, although trade between emerging economies has continued to grow, the rate at which it has grown has slackened off considerably, as shown in Figure 1. South-South trade is less than 50% of the value of trade between emerging economies and although it is likely to reach 50% in the final quarter of this year, on current trajectories it will only really take off in the first quarter of 2016.


Figure 1  |  North-North and South-South trade, June 2001-December 2016
Source  |  DeltaMetrics 2014


Second, trade between emerging economies is very different to the trade between developed economies: it tends to be highly concentrated in commodity and intermediate technology products. For example, 18 of Latin America’s top 30 exports are commodities and a further five intermediate products. Cars, tractors and refrigerators are exceptions. Apart from cars, South Africa and Russia predominately export commodities. Asia tells a similar story with commodities comprising ten of its top 30 export products and intermediate manufactured goods 16 out of the top 30… This paints a picture of interdependency in commodity and intermediate manufacture supply chains but with real dependency on the developed “north” for imports of luxury goods like cars.

Third, although this is an opportunity for the expansion of the Yuan across commodity trade and supply chain finance, because China is so powerful within the BRICS accounting for some 64% of their trade, it also means that the BRICS bank will become imbalanced if it doesn’t expand its remit. For example, Delta Economics sees the growth in trade finance in base metals between China and South Africa growing by over 50% over the next five years, while trade finance in mineral fuels between China and Russia is expected to grow by nearly 60% over the same time period. This is in spite of the current crisis in Ukraine, reinforcing the view that Russia will shift its trade with the developed world to other regions where sanctions are more limited.

Indeed, the importance of China helps to explain the importance of its currency in relation to trade. While the other BRICS currencies are either relatively weakly, or not at all correlated with BRICS trade, the Yuan’s correlation is -0.94%. In other words, as the Yuan weakens, BRICS trade strengthens, as shown in Figure 2.



Figure 1  |  Value of BRICS exports to the rest of the world versus CNY per USD, Last Price Monthly, June 2001-July 2014
Source  |  DeltaMetrics 2014


The Yuan is not a freely floating currency and its recent depreciation has helped both Chinese trade and BRICS trade more generally. But Figure 2 really tells us two things:

•  The Yuan is growing in importance as a trade currency (and therefore as a trade finance currency). If the correlation remains this strong then it is very likely that it will become as important as the Euro is for Europe in pricing BRICS trade

•  2014 has been a difficult year and will continue to be for BRICS trade with Europe. The fall-off in trade with the rest of the world at the beginning of 2014 coincided with a big drop in Chinese exports in Q1 and the South African miners’ strike which affected base metal exports. Although there has been some recovery, it has been volatile and is continuing to be affected by the spill-over effects from the Ukraine crisis. This is also affecting Russian oil exports to Europe.

So finally, the BRICSS’ and, more specifically, China’s dominance both of inward investment and of trade across emerging markets will be reinforced by the BRICS bank which will both act to formalise the relationship between the countries. This will effectively make them a formal “bloc” in their own right but also increase their economic independence and influence. Figure 3, for example, illustrates the importance of Sub-Saharan Africa to BRICS trade. Much of this is because of Chinese inward investment to ensure commodity supplies but also reflects the importance of the region to South Africa as well. It is also the region to have suffered most from the drop in trade in Q1 2014 and, while Delta Economics sees trade recovering between BRICS countries and the other three trading blocs, it will take longer for exports to Sub-Saharan Africa to recover to the levels they were at in 2013.



Figure 3  |  Value of BRICS trade to selected emerging regions, (USDbn/USDm) June 2001- Dec 2016
Source  |  DeltaMetrics 2014


This stresses the importance both of the infrastructure remit of the BRICS bank and its role beyond the five countries of the BRICS. If it is supporting growth and infrastructure development from those countries to other emerging economies then it is a counterbalancing force for emerging market trade development globally, and not just within the BRICS.

For the BRICs bank, then, there is an opportunity and a challenge. The opportunity is to establish the bank as a meaningful counter-balance to the IMF with sufficient funds and a broad enough remit to support both the infrastructure and the reality of trade and trade finance. While the bank currently is limited in its remit to infrastructure and joint economic development, this should not remain the case for the simple reason that the BRICS bloc itself is too important to the rest of the world in terms of commodity and intermediate goods supply for it not to extend its support beyond those countries.

The emerging world, and the BRICS in particular, is fraught with geo-political, economic and structural economic development challenges that are reflected in the trade statistics for 2014, and this is the challenge of the BRICS bank. It is not enough to set up an institutional counterpart if that institution is already saddled with the same imbalances as the IMF and if it likely to have to deal with high levels of sovereign debt and the fallout from sanctions against Russia. Its capital base will need to be large for this, as will its remit!