Assessing the Opportunities and Threats in BRIC for 2014-2016

November 30, 2013. The bundling of the world’s largest emerging economies under the acronym BRIC made sense back in 2001, but the ever-apparent differences between the countries and the subsequent changes in the global economy show that having a clear understanding of the intricacies within each country and its developments remains as important as ever.

As the second largest economy in the world today, China is nearly four times larger than Brazil, the smallest BRIC economy. China is ranked 29th in the World Economic Forum’s latest Global Competitiveness Index while Brazil (48th), India (59th), and Russia (67th) are ranked much lower in the Index. Southern Africa ranks closer to these countries (53rd) and has joined India and Brazil to form their own group, known as IBSA.

The key similarities between the BRIC countries up to 2008 were their scale of economy, weak correlation with the global economy, and dynamic growth. Since then, BRIC markets proved to be extremely lucrative for investors with relatively low risks. The tide has since turned for some BRIC countries, and yet together they are now a stronger global force than ever before. They produced a quarter of global output in 2012, and are forecasted to generate about one-third by the end of the decade. This also gives them a strong collective political voice.

What will the future hold?

We ask four of M-Brain (formerly GIA)’s emerging market experts about their personal views on where their countries are heading.

Overview of BRIC for 2013-2016

Overview-of-BRIC-2013

Please scroll down for complete table.

Brazil

Natan Rodeguero

Vice President, Intelligence Services, M-Brain (formerly GIA) Brazil

Brazil is going through a transition period where the outcomes by 2016 are still unclear. The highly anticipated FIFA World Cup in 2014 along with the Olympics in 2016 are meant to be positive turning points for the country, yet a heavy bureaucracy, a general lack of planning, and corruption still permeate all levels of the economy. This is reflected in Brazil’s low World Bank ranking for the ease of doing business: 116th out of 185 countries.

The many infrastructure projects that were announced to meet FIFA’s requirements, notably those for urban mobility, have either been abandoned or severely delayed. Most will be completed at twice or three times their originally estimated cost. Since a large share of the investments in infrastructure projects came from public money, the concern for 2014-2016 will be who will end up paying the bills.

On another front, the Brazilian Congress continues to lose popularity and credibility with local citizens, reflected by the wave of protests that started in June 2013 and still linger in many cities, albeit on a smaller scale. Protesters, still without a clear leadership, are demanding many improvements, from better public health, education, transport infrastructure and security to lower taxation and corruption. It is not certain that President Dilma Rousseff will return to office in 2014, which will be unfortunate as continued strong leadership is badly needed.

Business opportunities in Brazil for 2014-2016

1. Infrastructure. Infrastructure is one of Brazil’s most appealing sectors, ranging from telecommunications to energy, roads and ports. Most investments are expected to be made by a combination of local and foreign companies, as these are large-scale projects. Mid-sized and smaller companies will benefit from the natural increase in business-to-business demand generated by these growing infrastructure segments.

2. Services. Insurance, financial services, tourism, and the entire retail value chain offer several growth opportunities. Brazil lags behind most global standards in this sector, but expenditures are also expected to increase here as services are a major part of the World Cup and the Olympic Games requirements.

3. E-commerce and M-commerce. As the market penetration of smart phones escalate in Brazil from 15% in 2012 to 40% in 2013, many opportunities arise for retailers and other companies that benefit from a mobile and a large, connected customer base.

Business threats in Brazil for 2014-2016

1. Difficulties in doing business. Brazil still needs to improve the conditions for companies to effectively conduct business. All sectors are highly taxed, and bureaucracy hinders many business initiatives. The long-awaited reforms will still take time to happen, as 2014 is an election year when not many substantive changes are expected.

2. Global economies continue to struggle. A large part of the Brazilian economy depends on exports. In 2012, it was valued at approximately $256 billion. Although internal consumption remains strong, Brazil may see a decrease in external revenues while other global economies struggle to recover.

3. Lack of investments from local companies and from governments in local infrastructure. Brazil’s growth has been based on strong internal consumption, much of it based on expansion of credit and family consumption. Larger investments in local industrialization is needed.

Russia

Alexander Pechersky
M-Brain (formerly GIA) Member in Russia, ALT R&C

Looking at its rankings in the World Bank’s Ease of Doing Business report, Russia has moved from 95th in 2007 to 123rd position. Prior to 2008, its businesses were able to take advantage of fast economic growth. Now we are seeing a rapid decline in growth rates due to several factors.

Business circles here had hoped that companies would be able to continue to grow in spite of social budget cuts and political stagnation. However, Russia’s institutional environment has not changed. No real improvements have yet been made in terms of ease of doing business or protection of property despite the country’s accession to the World Trade Organization (WTO). Russia also has a strong dependence on external economic factors in places such as Europe and the volatile Middle East.

Hosting the Winter Olympic Games in 2014 will have a major long-term impact on the Russian economy as the infrastructure developed for the games will be actively used afterwards. Also, hosting the FIFA World Championship in 2018 will create an influx of both foreign and domestic investments in tourism, food and beverage, and transportation.

Businesses in Russia will need to ensure that they have the latest market facts and are willing to adapt to the constantly changing market situation to maintain and increase their competitive advantage.

Business opportunities in Russia for 2014-2016

1. WTO accession. In 2012, Russia officially joined the WTO. The required adoption of WTO rules opened up many new opportunities across a whole set of industries which were previously highly regulated. Some sectors have a transition period until 2020 when many preferences will be given to local producers. This will provide an opportunity for international companies that are considering locating in Russia. For other sectors, the situation will be reversed as custom duties and rules are decreased and simplified, providing new opportunities for imports and a modification of comparative pricing strategies. Sooner or later, the rules of the game will be changed in a majority of the industries and companies will have to thoroughly re-think their strategies.

2. State support of hi-tech industries. The ultimate priority of the Russian government is economic diversification, moving it away from its oil and gas dependency. Therefore, the government will allocate many investments to industries with hi-tech technologies. In addition, the focus will be on localization of advanced processing technologies and on transferring R&D activities and knowledge. There are many examples: investments of over $5 bln by the Rusnano corporation in nano-technologies; the creation of the Russian Venture Corporation; the Russian Silicon Valley project in Skolkovo; and the Russian pharmaceutical 2020 program. Russia has significant intellectual potential and competences in software development and information technology. All this provides reasons to consider Russia as good location for hi-tech projects and cooperative ventures.

3. Service sector growth. The Russian population is becoming richer despite the economic slowdown. The service sector is still underdeveloped compared to that in the EU or US. A high potential still exists for B2C services in banking, insurance, travel, entertainment, restaurants and hotels. In addition, B2B services with much potential include consulting, IT-outsourcing, design, engineering and project management.

Business threats in Russia for 2014-2016

1. Global economic downturn. Russia is not isolated from the global economy and any downturn will have the potential to depress Russia’s growth prospects.

2. Further development of shale gas exploration and production. This effort could affect the Russian economy in two ways. First, it provides competition for Russian oil and gas producers. Second, increased production could depress global commodities prices.

3. Further political stagnation. The overall trend in Russian political life is to grow the role of the State in the economy by controlling more and more of the social and business environment. This development would preserve the key weaknesses of the Russian economy (corruption, bad infrastructure etc.) and further suppress entrepreneurial and business activity as well as decrease the ease of doing business in Russia.

India

Vishwanath Desai
Senior Consulting Manager, M-Brain (formerly GIA)

In October 2013, the Asian Development Bank (ADB) cut India’s economic growth forecast for 2013-14 to 4.7%, considerably lower that 6% projected in April this year. Compared to China, which has attracted relatively more stable foreign direct investment (FDI) inflows, India has seen more volatility in FDI inflows during last five years. For example, FDI inflow rose up to US$36 billion in 2011 and then fell to US$25.5 billion in 2012.

The country faces a number of challenges, such as a widening account deficit, near double digit Cost-Price Index inflation (9.52% in August 2013), poor basic infrastructure, corruption, political instability, and slow moving reforms. The impact of these issues can be seen in India’s ranking in the World Economic Forum’s Global Competitiveness Index, where the country slid down from 56 in 2011-12 to 60 in 2013-14.

Indian general elections are due in May 2014 and there is increasing pressure on the government to restore the country’s growth. India’s central bank, the Reserve Bank of India (RBI), and the United Progressive Alliance (UPA) government have taken a series of measures to curb inflation, restore FDI inflows, and put the economic growth back on track. Earlier this year, the Finance Ministry increased the import duty on gold, the biggest non-essential item on the import bill, to reduce India’s account deficit. The RBI raised the repurchase rate (repo rate) to 7.50% in September 2013 to contain inflation, and reduced the marginal standing facility rate (9.5% in September 2013) to maintain liquidity.

While the recent measures taken by RBI and the government have been somewhat successful in decelerating the rise in inflation and currency depreciation, the business community remains watchful.

Despite economic challenges and a complex business environment, India is still an attractive market for investment and business. According to IMF’s projection, India’s GDP is forecasted to grow at 6-7% during 2013-2018, which is significantly higher than the G7 countries that are forecasted grow at 1-3% in the same period.

With a billion-plus population, a rising middle class and a growing number of young consumers, India presents a multitude of opportunities for a number of sectors including education, retail, technology, clean tech, financial services, and healthcare. In order to exploit market opportunities in India, a company must understand the true market potential as well as the differences in regional markets and customer segments, in order to effectively implement their market strategies. It is equally important to closely monitor the market environment and adapt one’s strategies to stay competitive.

Business opportunities in India for 2014-2016

1. Services sector. The services sector in India, which consists of a large number of segments, accounts for nearly 60% of the nation’s GDP. The Confederation of Indian Industries (CII), an association of Indian businesses with over 7,100 member companies, projects a 5% growth in the services sector during 2013-14. Sectors such as insurance, e-commerce, IT services for domestic banking, and telecommunications will see significant growth in the next two years. A key driver for growth in insurance is the recent raise in the FDI cap from 26% to 49%. The potential of E-commerce in India still remains untapped. IT services for domestic financial services would benefit from a modernization of the banking system. Similarly, telecom services will continue to grow due to the increasing penetration of mobile and the adoption of 3G and 4G services. The Government is in the process of setting up a task force that would focus on creating enablers for growth in the services sector.

2. Infrastructure. The central and state governments are continuing to invest in roads and rail and are also exploring options such as cooperating with China for infrastructure development. The sector presents opportunities for related industries such as construction and maintenance, construction equipment, financing, and transportation technologies.

3. Healthcare. A huge gap remains between the demand for and supply of healthcare services, and the unorganized nature of the sector in India offers a unique market opportunity to develop and grow healthcare businesses in India. While tier-1 cities show increasing demand for sophisticated healthcare services, newly urbanized areas and lower tier cities also present a strong potential for developing quality and affordable healthcare services.

Business threats in India for 2014-2016

1. Rising fiscal deficit and currency fluctuation. India’s large fiscal deficit, combined with the decline of the rupee in recent months and record high inflation, have increased concerns among foreign investors and led to lower savings and lower economic growth of the nation. Although the UPA government has taken a series of measures to tighten fiscal policies, reducing the fiscal deficit requires stronger reforms and an effective implementation of policies.

2. Upcoming elections and its impact on reforms. The general elections are due in mid-2014 and we are unlikely to see any major reforms from the government prior to these elections. As a result, the Indian economy is expected to grow at a slower pace in 2014. Opinion is divided on how long after the elections it will take for reforms to pass through the parliament and for them to take effect.

3. Complex business environment. Indian taxation, legal, and bureaucratic systems are fairly complex and they create a challenging operating environment for businesses. For example, Nokia threatened to close its factory in Chennai, a metro city in southern India, due to disagreements with the state government on taxation issues.

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