HOW DO THE BRICS COUNTRIES COMPARE WITH REGARD TO STRENGTH OF

THEIR CURRENCY VIS-À-VIS MAJOR TRADING CURRENCIES – EURO, DOLLAR

Section B Macro Economics Theory and Policy

Members: Diksha Rajani (070), Snehal Bhuwalka (102), Soumya

Group 4
 How do the BRICS countries compare with regard to strength of their currency vis-à-vis major trading
currencies – Euro, Dollar and pound?

How do the BRICS countries compare with

INTRODUCTION
This research report is prepared with an objective of understanding the subject title “How
do the BRICS countries compare with regard to strength of their currency vis-à-vis major
trading currencies – Euro, Dollar and pound?” and is submitted as a part of academic
curriculum requirement for the purpose of assessment by Professor Sahana Roy Chowdhury.
The report deals with macroeconomics concepts of foreign exchange applicable to the
BRICS economies and also throw light on their current scenarios.

“BRICS members have an interest in developing a world with multiple countries filling
leadership roles, so they will be looking to "take advantage" of tensions to "to build
up the profile of BRICS"
- Duncan Innes-Ker

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How do the BRICS countries compare with regard to strength of their currency vis-à-vis major trading
currencies – Euro, Dollar and pound?

Index:

1. Introduction to BRICS

2. BRICS Milestones

3. Performance of BRICS against Major Trading Currencies

4. Our Observations and Conclusions

5. Bibliography

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Introduction to BRICS

BRICS is the acronym coined for an association of five major emerging national
economies: Brazil, Russia, India, China and South Africa. Originally the first four were
grouped as "BRIC" (or "the BRICs"), before the induction of South Africa in 2010.[4] The
BRICS members are known for their significant influence on regional affairs; all are
members of G20. Since 2009, the BRICS nations have met annually at formal summits.

China hosted the 9th BRICS summit in Xiamen on September 2017, while South Africa
hosted the most recent 10th BRICS summit in July 2018. The term does not include
countries such as South Korea, Mexico and Turkey for which other acronyms and group
associations were later created.

In 2015, the five BRICS countries represent over 3.1 billion people, or about 41% of the
world population; four out of five members (excluding South Africa at #24) are in the
top 10 of the world by population.

As of 2018, these five nations have a combined nominal GDP of US$18.6 trillion, about
23.2% of the gross world product, combined GDP (PPP) of around US$40.55 trillion
(32% of World's GDP PPP) and an estimated US$4.46 trillion in combined foreign
reserves. Overall the BRICS are forecasted to expand 4.6% in 2016, from an estimated
growth of 3.9% in 2015. The World Bank expected BRICS growth to increase to 5.3%
in 2017. The BRICS have received both praise and criticism from numerous commentators.

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Bilateral relations among BRICS nations have mainly been conducted on the basis of non-
interference, equality, and mutual benefit.

BRICS Milestones and Summits

The grouping has held annual summits since 2009, with member countries taking turns to

host. Prior to South Africa's admission, two BRIC summits were held, in 2009 and 2010. The

first five-member BRICS summit was held in 2011. The most recent BRICS summit took place

in South Africa from 25 to 27 July 2018.

A look at some milestones in the BRICS journey over the last decade:

2001: The acronym BRIC was first used by Goldman Sachs, the multinational investment firm,

in their Global Economics Paper, “The World Needs Better Economic BRICs” projecting that

the economies of Brazil, Russia, India and China would be among the world’s largest in the

next 50 years.

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2006: As a formal grouping, BRIC started after the meeting of the leaders of Russia, India

and China in St Petersburg on the margins of G8 Outreach Summit in 2006. The grouping

was formalised after their foreign ministers met on the margins of a United Nations general

assembly meeting in New York.

2009: The first BRIC Summit was held in Yekaterinburg, Russia, on June 16, 2009. The

leaders discussed the current global financial crisis, global development, and further

strengthening of the BRIC group.

2010: It was agreed to expand BRIC into BRICS with the inclusion of South Africa at the

grouping’s foreign ministers meeting in New York in September 2010. Apparently two

African countries were being considered as candidates, Nigeria and South Africa; including

South Africa kept the acronym intact.

2011: South Africa attended the 3rd BRICS Summit in Sanya, China, for the first time. Brazil

and India pressed China to buy such goods as Brazilian aircraft and Indian pharmaceuticals;

the two countries also complained about the artificially undervalued yuan they claimed was

undermining their exports.

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2014: The grouping launches a multilateral New Development Bank (NDB) for infrastructure

needs and the Currency Reserve Arrangement (CRA). The latter is a commitment by the five

countries to set up a $100-bn pool of currency reserves to help forestall short-term liquidity

reserves. China, with $41bn, contributes the most. India contributes $18 bn.

Performance of BRICS against Major Trading Currencies

BRICS have had a tough tenure in the past decade due to a lot of instability political and

economic environment all around the globe in the past decade. The currencies of BRICS

members have been depreciating in comparison to dollars which are further hurting their

growth prospects. This depreciation has also led to a weaker valuation in comparison to

other major currencies like pound and euro. The members have taken a lot of good initiatives

to stabilize their economies (mentioned in the milestones) but haven’t been able to do so to

a large extent. Following are the few reasons for their unstable growth patterns:

1. BRICS straddle one quarter of the world

The story of the BRICS—or technically, BRIC countries (South Africa joined in 2010)—begins

with Goldman Sachs chief economist Jim O’Neill, who wrote a paper in 2001 arguing that

these were the emerging superstars most likely to dominate the 21st century globalized

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economy. Taken together, these five countries cover 40 percent of the world’s population

and more than 25 percent of the world’s land. The sky seemed the limit.

They delivered on some of that promise—between 1990 to 2014, these countries went from

accounting for 11 percent of the world’s GDP to almost 30 percent. Yet, the global financial

crisis inflicted lasting damage, and Goldman Sachs shut down its BRIC investment fund in

late 2015 after its assets plunged in value by 88 percent from their 2010 highpoint. But

the group continues to meet and to talk up an ambitious common agenda.

Roughly speaking, the BRICS can be broken into two groups—those that took advantage of

globalization’s march to integrate themselves into global supply chains (primarily China and

India) and those that took advantage of globalization to sell their abundant natural

resources (primarily Brazil, Russia and South Africa).

2. China and India’s middle classes are surging

Let’s start with global supply chains, and their biggest success story: China is now the second-

largest economy in the world by GDP and poised to overtake the US for #1 over the next

few years. In 1990, China produced less than 3 percent of the world’s manufacturing output

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when measured by value; by 2015, it produced roughly 25 percent. And as went China’s

manufacturing prowess, so went China’s middle class. In 1990, China made up zero percent

of the global middle class; by 2015 it comprised 16 percent, and another 350 million

Chinese people are expected to join by 2030.

India is a similar story, but instead of focusing on manufacturing, it went the services route

instead. Today, services account for roughly 61 percent of its GDP, with a particular

emphasis on IT—at $108 billion, India is one of the world’s leading IT services exporters.

And the rise of India’s middle class resembles that of China’s; Indians went from 1 percent

of the global middle class in 1990 to 8 percent in 2015, with another 380 million Indians

expected to join by 2030.

3. The collapse in commodity prices has threatened the other BRICS nations

The picture is decidedly mixed, meanwhile, with the other BRICS countries, who rose mainly

on the back of their vast natural wealth. Brazil sells commodities like soybeans, iron ore,

and crude oil on global markets. Combining that financial windfall with innovative social

programs helped lift 29 million Brazilians from poverty between 2003 and 2014. As a

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group, Brazil’s poor are arguably the largest beneficiaries of globalization in the Western

hemisphere.

South Africa also used its natural wealth—in this case rare gems and metals like gold,

diamonds and platinum—to help get its economy on track following apartheid. In 1990, the

country exported $27 billion worth of goods; by 2011, that number had increased nearly

five-fold. And then there’s Russia, which spent the 1990s rebuilding itself from the rubble of

the Soviet Union. Thankfully, the country is blessed with abundant energy sources—crude

oil, natural gas, metals and minerals—that helped it find its footing. In 2000, 29 percent of

Russians lived below the poverty line; by 2012, just 11 percent did.

But the fall in commodity prices of recent years has done significant damage in all three

countries— where Brazil’s 3-year average GDP growth between 2005-2007 was 4.41

percent, the last three years have seen an average growth of -2.29 percent. Over the same

time periods, South Africa’s growth rate has fallen from 5.41 percent to 1.09 percent;

Russia’s from 7.69 percent to -0.77 percent.

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4. Corruption is still endemic within the BRICS

All of these five countries have been held back by corruption, in varying ways, but their

rising importance to the global economic system ensures the spotlight now shines brighter

than ever. Yet some of the BRICS countries have handled it better than others.

Brazil’s spiraling corruption investigations have already felled former president Dilma

Rousseff and threaten the current administration of President Michel Temer. On the bright

side, these same corruption investigations have made Brazil the gold standard of judicial

independence and rule-of-law in Latin America. In South Africa, corruption allegations

continue to pile up against the ruling ANC party and the country’s president Jacob Zuma,

who is awaiting a supreme court hearing in September to see if 783 criminal charges against

him will be reinstated. Thanks in part to a campaign by opposition activist Alexei Navalny,

47 percent of Russians now believe “corruption has significantly taken hold in the Russian

government.” Don’t expect much change there, however, even after the 2018 presidential

election.

India and China have made bolder attempts to combat corruption. Under Prime Minister

Narendra Modi, India’s government decided to do away with 500 and 1000 rupee notes

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(86 percent of the currency in circulation at the time) in a bid to clamp down on tax evasion

and the black market. And while early returns haven’t been great, Modi has gotten even

more ambitious with the introduction of a biometric ID system, intended to bypass corruption

and fraud by distributing public subsidies and unemployment benefits directly. Despite

privacy concerns, more than a billion people have signed up.

China’s President Xi Jinping, meanwhile, is using a massive multiyear anti-corruption drive

(nearly 300,000 Communist Party officials were punished for corruption offenses in 2015)

both to consolidate power ahead of a major leadership transition around Xi this fall and to

restore the ruling party’s image as defender of the Chinese people.

5. The “winners” remain at risk

It would be easy to label India and China as the clear winners among the BRICS, but it’s not

that simple. Yes, India and China have the fastest growth rates of any major economies in

the world, and citizens of these countries remain optimistic about the future. But nearly 50

percent of Indians remain vulnerable to a slide back into poverty, and China’s economy has

slowed as higher wages make manufacturing more expensive. Both countries are especially

vulnerable to technological changes that bring automation into the workplace on a larger

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scale. The World Bank estimates that 68 percent of all existing jobs in India are “at risk”

from automation. In China, the figure is 77 percent.

Our Observations and Conclusions

After carefully analyzing the BRICS economies, we can successfully conclude that the

members are facing currency devaluations due to many major issues taking place in the

world economies. It includes factor such as American Chinese Trade Wars, Strengthening of

Dollar due to protective practices, increase in Oil prices, etc. These events have created an

environment of instability and volatility across the global. Investors and international trade

organizations have become highly cautious and are pulling back from high risk businesses

and investment propositions to safeguard their wealth, leading to withdrawal of major

currency in the market, which in turn has led to appreciation of foreign currencies due to

demand supply gap. This effect has also impacted the demand and supply of member’s

currencies in the markets vis-à-vis dollars causing a setback for the BRICS. Depreciation of

member’s currencies in comparison to dollar have also affected valuations with other major

trading currencies due to PPP methodology of currency valuation.

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At last, we believe that the emerging economies are struggling to keep their currency due

to external factors. These struggles have heavily impacted to the economies and their

international trade leading to faster depreciation of their respective currencies.

Bibliography

1. https://www.hindustantimes.com/india-news/six-important-milestones-in-the-brics-

journey/story-UP50e0gfsuG2Sg8tOX5iSJ.html

2. https://en.wikipedia.org/wiki/BRICS

3. http://www.iraj.in/journal/journal_file/journal_pdf/14-348-149440791133-

44.pdf

4. http://time.com/4923837/brics-summit-xiamen-mixed-fortunes/

5. https://www.researchgate.net/post/The_currencies_of_BRICS_countries_are_depre

ciating_considerably_Does_this_lead_to_another_financial_crisis

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