Thursday, September 5, 2013

The BRICS were overhyped for too long

These economies – the BRICS (Brazil, Russia, India, China, and South Africa) and others – were overhyped for too long. Favorable external conditions – the effect of China’s strong growth on higher commodity prices and easy money from yield-hungry advanced-economy investors – led to a partly artificial boom. Now that the party is over, the hangover is setting in.
This is especially true in India, Brazil, Turkey, South Africa, and Indonesia, all of which suffer from multiple macroeconomic and policy weaknesses – large current-account deficits, wide fiscal deficits, slowing growth, and above-target inflation – as well as growing social protest and political uncertainty ahead of elections in the next 12-18 months. There are no easy choices: defending the currency by hiking interest rates would kill growth and harm banks and corporate firms; loosening monetary policy to boost growth might push their currencies into free-fall, causing a spike in inflation and jeopardizing their ability to attract capital to finance their external deficits. - in project syndicate
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