Reality bites for emerging market reliance on Chinese growth

Guido Mantega, Brazil’s finance minister, is known for his ability to put an optimistic spin on any piece of news.

But even he struggled this week when it came to explaining an important element of the country’s disappointing first-quarter economic performance – a drop in mining output.

“The mineral extraction industry depends much more on the external economic scenario than others, which remains adverse outside Brazil, therefore, making our exports more difficult,” the minister lamented.

The weakness in the mining sector – the great paymaster of the Brazil’s economic boom of the past decade with its shipments of iron ore to China – hints at a deeper, more uncomfortable truth not only for Latin America’s largest economy but also for the other non-Chinese members of the so-called Brics club of large emerging nations, which also includes Russia, India and South Africa.

China, for 10 years the principal driver of the phenomenon known as “south-south” trade between emerging economies, may not only be slowing down from the breakneck growth rates of the past. It may also be changing its model from the outward-looking, export-led structure that favoured trade with emerging nations – particularly commodity exporters in Latin America, Russia and Africa – to one based more on internal consumption.

It is a concern that started to hit home this week with three of the Brics nations – Brazil, South Africa and India – reporting disappointing first-quarter gross domestic product figures.

“Markets are showing growing concerns about the sustainability of China’s current growth model,” Andre Loes, HSBC Latin America chief economist, said in a report released this week.

The question for the non-Chinese Brics countries and other developing nations is how much growth can they expect from “south-south” trade with a less exuberant China – particularly as the recovery in developed economies is anaemic at best?

According to data compiled by the Brazilian government, exports between the Brics nations was about $282bn in 2012, up tenfold on a decade earlier. China easily accounts for the lion`s share of this intra-Brics trade, or about 38 per cent of exports between the members, followed by India with 22 per cent and the others with numbers in the teens.

The Brics’ total trade, including with the developed world and other emerging nations, was worth $6.04tn last year, almost two-thirds of which involved China, said the Brazilian government.

Trade among all emerging nations excluding China is estimated at $3tn, according to International Monetary Fund data.

Much of this is regional trade. Brazil, for instance, relies heavily on Argentina for exports of its manufactured goods. But an increasing amount is overseas trade. Africa, in particular, is becoming a battleground among the Brics and other emerging markets seeking to tap the continent`s natural resources or to create new destinations for their exports.

Significantly, the Brics trade more with Africa than they do among themselves, says Jeremy Stevens, economist at Standard Bank, Africa’s largest bank by assets.

The bank estimates that total Brics trade with Africa reached $340bn in 2012, representing a more than tenfold increase over the course of a decade. Since 2007, the bloc’s trade with Africa has more than doubled, led by South Africa.

“Looking ahead, we hold firm to our widely cited projection that Bric-Africa trade will eclipse $500bn by 2015, roughly 60 per cent of which ($300bn) will consist of China-Africa trade.”

Brazil’s links are primarily in energy and agriculture, with a focus on Portuguese-speaking Africa, such as Mozambique, where Vale, the commodities exporter, is developing a multibillion-dollar coal operation, and Angola, the continent’s second-largest oil producer after Nigeria.

“Russia’s got plenty of energy so it doesn’t have the same incentive to go into Africa as, say, the Chinese or the Indians have,” said Charles Robertson, global chief economist at Renaissance Capital, one of Russia’s highest-profile investors in Africa.

India’s prospects in Africa look particularly good as a low-cost manufacturer and service provider. Indian industrial groups, including Godrej and Tata, are particularly enthusiastic about growing markets in Africa, where entrepreneurs of Indian origin have operated for many decades.

“There are tremendous similarities between the economic growth you see in Africa and what you see in India,” said Mukund Govind Rajan, brand custodian for Tata Sons, noting that the group turns over $2.3bn a year in Africa and employs about 4,000 people there.

Contrary to the perception that Asian companies are interested mainly in resource extraction, he says Tata invests in hotels, the auto industry, telecoms and power as well as mining. Other Indian companies are investing in sectors such as consumer goods and pharmaceuticals.

India’s diversified approach to Africa leads some analysts to believe that south-south trade is already strong enough to deliver growth, even without China.

“Overall south-south trade has been growing in different regions. . . If you remove China, the significance of south-south trade remains,” says Biswajit Dhar, director-general of Research and Information System for Developing Countries, an Indian think-tank.

But others caution that the winners and losers may be divided into two camps.

South-south trade is unlikely significantly to help those emerging nations that are dependent on commodities exports, whose prices will suffer from softer Chinese demand. Many Latin American economies, such as Chile, Peru and Brazil, fall into this camp.

However, those such as Mexico, India and some east Asian developing countries that compete with Chinese manufacturers could thrive as rising costs in China make its exports less competitive in other emerging markets.

“Countries that could do well are those that rely more on exports of manufactured goods – Mexico, other emerging Asia,” said David Rees of Capital Economics.

In such a scenario, Brazil’s finance minister Mr Mantega might do well to keep honing those skills of optimistic spin.

Source: http://www.ft.com 
Time: May 31, 2013 8:12 pm By Joe Leahy, Andrew England and Victor Mallet