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BRICS: A roller-coaster ride ahead?

Roller coaster risk tolerance
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The BRICS - Brazil, Russia, India, China and South Africa - officially grouped together in 2009 due to similar political and economic situations, have had a roller-coaster ride this week after reports such as mixed Chinese data, comments made by Russian President Putin, the ongoing discussion on the Brazilian President's impeachment and the weak South African rand hit news wires.

The five-nation group had been dealing with similar economic problems when grouped together, but their situations have changed over the years. They continue to remain a significant economic force, especially after a BRICS bank was set up last year. The New Development Bank (NDB) established by the BRICS group, recently approved the issuance of five-year bonds in Chinese yuan, Interfax reported. The bank, established last year, is expected to raise funds on the Chinese market for now, while it waits for approval to tap into international markets.

But with uncertainty around oil prices and global growth surrounding emerging economies, it could be a rough ride ahead. Earlier this week, the IMF cut global forecasts and warned emerging markets of economic headwinds as their currencies could weaken further. Falling oil and commodity prices have already cut deep through a number of emerging nations, for instance Brazil and Russia. But ongoing political chaos in Brazil is further weighing on the country's economy.

The country's Supreme Court has rejected a request from the government to avert the impeachment process against President Dilma Rouseff. The impeachment proceedings are based on allegations that she violated federal budget by using loans from state-owned banks to mask the size of the government's budget deficit, Reuters reported.

The Brazilian real rallied on the news of impeachment, amid hopes that a change in government will bring investor-friendly policies for the economy. The IMF's latest report sees Brazil's recession deepening and the economy shrinking by half a percent in 2016.


Also hit by the plunge in commodities is Russia which is struggling become less dependent on oil prices. In an interview with CNBC, Russian finance minister Anton Siluanov said the country is trying to find ways to work with the current oil prices at $40 a barrel.

While analysts warn of investments in Russia, Mark Mobius, executive chairman of Templeton Emerging Markets told CNBC, the Russian market offers the "bargain of the century." "Russia is very cheap," Mobius said, adding, "the problem is the sanctions. Many of us cannot invest because of the sanctions. Once sanctions are released, then the market is going to do very well."

Low growth and high inflation is a problem for a number of emerging market countries. Although India is one of the stronger BRICS countries, it is not insulated from economic headwinds. The country's central banker Raghuram Rajan told The Wall Street Journal in an interview that India may have room to further cut policy rates if inflation continues to ease and monsoon rainfall is in line with the forecast. The Reserve Bank of India cut its key policy repo-rate by 25 basis points.

However, topping the interest rate cut list is China which has already cut rates six times since November 2014 in order to spur activity in the economy. While data out of China has remained mixed and continues to concern investors, analysts have said the stimulus has started to work and the country will start to stabilize soon. Due to the size of the economy and its contribution to the global GDP, Chinese growth figures continue to remain in focus.

"We have severe macro fundamentals that are very poor, that mean that rand is very vulnerable to further depreciation pressure" -David Faulkner, Sub-Saharan Africa Economist, HSBC

Meanwhile, South Africa, the country completing the 'BRICS' acronym will grow a mere 0.6 percent in 2016, according to the IMF forecast, as the struggling mining sector weighs on exports. The stronger dollar has also added pressure to the rand which is down nearly 6 percent year-to-date.

"Our view is that we have severe macro fundamentals that are very poor, that mean that rand is very vulnerable to further depreciation pressure," David Faulkner, Sub-Saharan Africa Economist at HSBC told CNBC on Friday. He explained that weak growth and inflation figures are putting pressure on ratings but the economic outcome of all that weighs on the rand in the medium and the longer term.

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