Did the BRICs ever have anything in common?

In 2001, Goldman Sachs bundled Brazil, Russia, India, and China together into an emerging market basket in deference to the four countries' size and economic potential. For most of the decade, despite significant differences in relative economic performance, the BRIC acronym has stuck.

Against the rapidly worsening global economic backdrop, however, a new report, "BRIC By Name, BRIC By Nature?", whether the BRIC countries ever shared much in common, other than scale and high portfolio inflows.

For various reasons -- not least its strong public finances, relatively less exposed financial system, low levels of private sector leverage, and potential to raise consumption's share in GDP --  of all four BRICs, China is probably best positioned to find endogenous solutions -- in particular fiscal stimulus -- to withstand an externally driven crisis.

On the other hand, Russia, due to the collapse in its terms of trade, the falloff in financial account inflows, the distress in its banking system, and the absence of excess capacity on the supply side, has access to fewer endogenous cures to the external gloom, although amid all the current difficulties, the Russian Federation can still boast some important ratings strengths, in particular relatively low levels of general government debt.

Although since 2001 the growth trend in all four BRICs was more or less the same (up), the pace of growth differed markedly.

In Brazil, despite positive demographics, GDP growth peaked at a relatively modest 6 per cent last year versus 1 per cent in 2001 (a year in which growth was, admittedly, depressed due to a severe localised energy crisis).

In Russia's case, the peak was 8.1 per cent in 2007 versus 5 per cent six years ago. Over the same period, China's growth was both higher and more sustained --averaging just under 10 per cent. The volatility of nominal, as opposed to real, GDP growth is far higher for all the BRICs, with the important exception of China, where exchange rate movements have been less abrupt and commodity dependency is non-existent. Indeed of all four economies, we believe that only China's will increase in size in US dollar terms during 2009.

Nominal dollar-denominated GDP is an important factor when assessing capacity to service foreign currency debt; it is no small concern, for example, that Russian dollar GDP is likely to decline some 20 per cent this year.

The trajectory and momentum of Chinese and Indian growth since early in the decade in our view manifests most of the characteristics of a structural -- ie, a permanent -- break with the past. Evidence of this includes the unusually and consistently high levels of gross domestic investment and its increasing role in the economy, as well as the tripling of average annual real export growth after 2001 for both India and China (a performance metric that neither Russia nor Brazil has approached).

While China and India stand to gain from falling input prices, which should help to protect margins in key export sectors, Russia and Brazil are in our view net losers from lower energy, metals, and agro prices.

Since the beginning of the decade, the investment boom in these two middle-income countries was closely correlated with commodity price developments, and hence has been interrupted by recent commodity price declines.

We believe that second round effects of declining terms of trade on growth and public finances in Russia and Brazil will be similarly adverse, particularly for the less diversified Russian economy, where the gap between exports and imports in volume terms has widened from a large positive differential as recently as 2006 to negative 16 per cent of GDP last year, versus close to zero for the more balanced Brazilian economy.

While imbalances in Brazil still may not be material, the country in our view nevertheless remains vulnerable to the volatility of the commodity and credit cycles. Due to its oil dependency and the legacy of its three-year domestic credit boom, we see Russian imbalances as far more glaring, although this susceptibility is, in our view, largely offset by Russia's superior public finances. Even these, however, may well suffer during 2009-2011 as a portion of the Russian Federation's sovereign contingent liabilities becomes explicit and a contracting economy drives the general government budget into deficit for the first time in over a decade.

We see the challenge for India as being to consolidate public finances in order to reduce its debt burden. We see China, on the other hand, as being able to boast of both a strong balance sheet and a diverse and competitive economy. With negative external financing needs, China is, in our view, less sensitive to generalised risk aversion than the other BRICs -- including Russia, which for the first time since 1997 is set to run a current account deficit during 2009.

China also, we believe, stands to gain the most from its fiscal stimulus program given the potential to raise domestic consumption's role in the economy.

Nevertheless, without sufficient and protracted stimulus, we think China's economy could potentially suffer a severe shock, which could enflame social pressures with political repercussions. Recent announcements from Prime Minister Wen Jiabao suggest a strong understanding of these risks and a willingness to access China's considerable assortment of domestic tools to steer the economy through the external crisis.