Have the repercussions of the economic crisis reached the Brics nations and Turkey? Their currencies have certainly started regressing in a manner that seems like a breakdown. Or are there other factors unrelated to the crisis?

These questions also have a bearing on other countries, especially the Gulf, as both India and China occupy top ranks among the GCC’s trading partners. They are the biggest importers of oil, petrochemicals and aluminium from the Gulf.

This means that any major economic changes in these countries will leave an imprint on this region as well. This calls for a certain amount of readiness to avoid repercussions if the economic situation in the Brics countries deteriorates further.

As a matter of principle, the present volatility in the group’s currencies is not directly linked to the international economic crisis. However, it is related to the Eurozone and major swathes of the global economy breaking free from the crisis’ bottleneck.

Investor temperament

This has led to new circumstances and greatly changed investor temperaments. When the crisis began, they had turned their attention to fast growing economies which led to an increase in demand for their national currencies that rose in value in relation to the major currencies.

Lately, the gains made by major indexes in the Eurozone, the US and the UK was followed by concerns regarding the state of the Brics’ economies as well as of Turkey’s. Investors became concerned of an erosion in the quality of assets in these countries and the inflationary pressures that are building up simultaneously.

In India, inflation touched 9.3 per cent last year. However, the authorities did not do much to drop inflation which then took a toll on the rupee which has dropped by 20 per cent against the dollar since January 2012. The Chinese currency was not greatly affected by US pressure to increase its value, while the Turkish lira dropped to around 2 Liras to a dollar.

Good numbers

Arab countries — and especially the GCC — have sizable investments in China and India among the Brics group. Their assets are still yielding good numbers, although their values in dollar and GCC currency terms have gone down.

More importantly here is the drop in Indian and Chinese growth rates below the high levels achieved in years past, although they are still reasonably high.

If the slowdown continues, then this will reflect negatively on GCC exports to these countries, particularly on oil and petrochemical products, which are the backbone of exports and face protection measures in European markets. This means it is in the interest of the GCC to assist Brics overcome their currency crisis.

This calls for Brics to re-evaluate their financial policies to reduce inflation and to strengthen and enhance their national currencies. It is true that these countries do not have the financial tools available in the EU and the US. However, their financial situation is still strong enough to direct their financial policy in a manner commensurate with their interests and those of their primary partners.

Moreover, we find that bureaucracy, corruption and complicated restrictions – including those of central banks — still represent barriers against foreign investments. These could lead foreign investors to re-evaluate their strategies.

This is especially true after the more flexible EU economies started coming out of their own crisis.

The GCC is required to lessen the possible repercussions for the Brics grouping as the pressure on their currencies might not be a temporary state of affairs. These countries still have strong potential; however, a re-evaluation is required from time to time in international relations based on emerging developments.

 

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.