BRIC Portfolios Top Developing Economies

MBA (6/25/2008 ) Palaparty, Vijay
A bulk of private capital flow among developing countries channels to only a few larger economies, namely Brazil, Russia, India and China (BRIC) according to a World Bank report. Some of the poorest countries rely primarily on official aid, which declined further in 2007.
The report said strongest gains in portfolio inflows were reported last year in India, $24.5 billion, and Brazil, $18.5 billion, somewhat offset by a decline in China of $8 billion.

“The largest emerging market economies play a prominent role in global equity markets where issuance is on par with that of high-income countries,” said Mansoor Dailami, manager of international finance in the development prospects group at the World Bank and lead author of the report, Global Development Finance, The Role of International Banking. “China, Brazil and the Russian Federation ranked above all countries except the United States by value of cross-border initial public offerings in 2007, accounting for almost one-third of the IPO total worldwide.”

The report revealed that companies based in each of the BRICs launched at least one IPO valued at more than $2 billion, including an $8 billion issue by the Russian bank, VTB Group, showing the depth of the global market for large equity issues by emerging markets.

Overall, developing countries became more vulnerable to external shocks when economic and financial conditions began to deteriorate in mid-2007, the report said. “The external financial position of many countries has weakened in the interim. Current account balances, for example, have worsened in two-thirds of developing countries. Half of developing countries ran current account deficits in excess of 5 percent of GDP in 2007.”

However, the report revealed that developing countries continued to accumulate foreign exchange reserves, which rose by $1.03 trillion in 2007—up from $634 billion in 2006. The BRICs accounted for over two-thirds of the increase: $462 billion in China, $169 billion in Russia, $96 billion in India and $94 billion in Brazil.

“Reserve holdings by all developing countries increased from 23 percent of their GDP in 2006 to 27 percent in 2007,” the report said. “The share of reserves held by the BRICs rose from 40 percent in 2000 to about 65 percent in 2007. China’s share of total reserves held by developing countries has been stable at about 40 percent over the past four years, while the share held by Russia increased from 7.5 percent to 12.5 percent.”

“Reserve holdings by all four of the BRICs greatly exceed levels required to provide adequate insurance against a sudden shift in private capital flows,” Dailami said. “At the end of 2007, the BRICs held $2.4 trillion in foreign reserves, an amount equal to 5.7 times the value of principal and interest payments due in 2008, compared with 1.8 times for other developing countries. In the case of India, the ratio has risen from 2.5 in 2000 to 8.4 in 2007.”

The report forecasts that total private capital flows might drop to around $800 billion in 2009, still the second highest level. It also predicts a slowdown in world GDP growth from 3.7 percent in 2007 to 2.7 percent in 2008, while growth in developing countries is expected to slow from a high 7.8 percent in 2007 to 6.5 percent in 2008.

"Strong growth in the developing world is certainly helping to offset the sharp slowdown in the U.S.," said Uri Dadush, director of the development prospects group and international trade department at the World Bank. "But at the same time, rising global inflationary pressures—especially high food and energy prices—are hurting large segments of the poor around the world."

"The presence of foreign banks in developing countries expands access to credit and as well as financial services, which can spur efficiency and innovation in domestic banks," Dailami said. "However, the ripple effect of shocks from the U.S. and European markets to certain developing-country financial markets highlights the need for better and more coordinated financial regulation, liquidity provision and macroeconomic management."