How BRIC Countries Are Reacting to the Crisis: Wharton

Fear and loathing are rampant at U.S. firms thanks to the financial crisis. But how are things seen in the fast-evolving BRIC countries -- Brazil, Russia, India and China?

The Wharton School at the University of Pennsylvania has some insight through its Knowledge@Wharton program.. They interviewed three business experts who know those countries. They are Shiv Khemka, vice chairman of SUN Group based in London, New Delhi and Moscow; Silas K. Chou, president and CEO of Novel Holdings in Hong Kong and Odemiro Fonesca, founder of Viena Rio Restaurantes in Rio de Janeiro.
How is India holding up?
Khemka: "The situation there is that the equity markets are down considerably, more than 50%. Credit is tight in the markets. Because India is not as export-led as China, underlying growth in the economy is still reasonable. I think expectations of growth [remain] north of 5%, perhaps in the 6% to 7% range."

Khemka: "Equity markets are down. But given the strong reserve position of the economy, and given the concerted action taken quickly by the Russian government to effectively inject liquidity into the economy through four main banks, I think there is a sense of confidence that this thunderstorm will pass, and things should be at least manageable over the coming years. Of course, individual entrepreneurs will face a lot of pain. Many oligarchs are publicly known to be in fairly difficult situations. But I think that all in all, from a broad economic point of view, Russia is reasonably well-positioned to weather the storm."

Chou: "In China, this so far is not too bad a thing. On the contrary, because China's economy is growing too fast, the preoccupation of the Chinese government for the last few years [has been] how to cool down the economy. So this crisis has slowed down everything around the world, and China is affected. As far as China can, it is trying to move away from too heavily relying on the exports sector of the economy to more domestic consumption. This can be an opportunity for China to cool down its economy a little bit, to [lower] inflation and to have a smooth transition to a domestic consumption economy."

Fonseca: "Brazil commodity prices were declining even before the crisis, and the stock market has declined by about 30%. [There have been] a lot of fluctuations. But there are no signs yet of economic decline. There is a lot of reserves -- for the first time in our economic lifetime, we are not going to have a foreign exchange crisis, as we have had in the past, because we have a lot of reserves, and because we have a flexible exchange rate. It has already started to adjust.... This has given the right sign to everybody. But of course, Brazil is going to be affected. For example, the foreign credit market was paralyzed for about 15 days. Now, [it is] working again."

Are there any specific sectors in India, Russia or China that you see contracting more than others?
Khemka: "From an Indian point of view, clearly export sectors will be affected. The real estate sector has taken a very severe downturn because of credit issues in the market. And naturally, demand domestically will fall. And so that's another sector that one needs to be careful about because of this heavy leverage. Any sector which has a lot of leverage would be a sector to watch carefully. In Russia, you know, the oil price being down where it is today means that the bonanza of the last few years, the boom times, are perhaps coming to an end."

Contracting sectors in China?
Chou: "China is severely affected in the export sector. But to put it in perspective, China was exporting too much. A tremendous surplus was causing a lot of the political problems around the world, especially with the United States. So this is a good pause for China. Now, it all depends if the Chinese economy can turn itself from heavily export-dependent to domestic consumption."

How have BRIC governments responded to the global crisis? In Brazil?

Fonseca: "Well, the government -- the executive -- so far is doing nothing. And I am glad they are doing nothing, because the Central Bank is doing the classical stuff. It's selling dollars, it's pumping liquidity into the economy, mainly when they had this pause in the credit markets. And they're waiting. They're talking about it, but no action so far."

In China?
Chou: "Everybody's scared ... because when you see the banks go into bankruptcy, that's a real case. They have heard about the word "bankruptcy," but have never seen a bank really fail. Most of China's reserves are in the United States ... in Treasury bills. And that has not been a bad place to be. China has made a fairly small investment in [places] like Morgan Stanley, Blackstone -- they lost some money, but relatively speaking, a very, very small [amount]. And so in this case, the government just waits and watches, but truly believes the U.S. will come out with certain solutions. And so we're optimistic that this will be over."

Khemka: "The Russian government actually acted in a very organized, focused and coordinated manner -- restoring confidence in the banking system to some extent by announcing increased liquidity into the system. By guaranteeing deposits ... by talking about cuts in oil export taxes, which will again give a boost to the economy, and by talking about significant investments in public infrastructure. And spending, which will, again, protect the lower end of the economy in terms of jobs and so on."