Brazil, India and South Africa, key nations in the Brics bloc, are all established and influential democracies with large populations and sizeable markets. They are also all sub-regional leaders and characterised by high degrees of inequality. Most importantly, they are all holding general elections in coming months.
In recent times, their respective economies have all been shaken by political and economic volatility. Macroeconomic risks have grown amid a protracted economic slowdown, the persistence of above-target inflation, and substantial depreciation of their currencies, as well as ratings downgrades, mass protest actions and ballooning fiscal deficits. Together with other emerging markets, they are facing the withdrawal of US monetary stimulus by the Federal Reserve.
Uncertainty will be the dominant theme as investors seek answers as to the trajectory of economic policy and whether the political will to arrest their negative spiral will be forthcoming after the elections.
At the forefront of investors’ minds is whether the new governments will adopt a populist or pragmatic approach to policy and, by inference, whether their political calculations will be more influenced by the threat of their electorates or those of global markets and ratings agencies. While political change can happen at any time, heightened uncertainty generally coincides with elections.
In India, the elections between April 7 and May 12 mark a crossroad critical to the programme for reforms needed for sustaining strong growth. There is concern that no matter which party is voted into power, it will have to form a coalition with smaller parties and some states will continue to be controlled by opposition parties, and that too, could stall reform. In the run up, the Congress-led United Progressive Alliance is under pressure because of high inflation, an economic slowdown and public dissatisfaction with allegations of graft in its second five-year term in office.
The Indian National Congress lost four of the five state elections late last year and is trailing in the opinion polls. In contrast, the Bharatiya Janata Party (BJP)-led National Democratic Alliance is in the ascendancy.
The BJP named Narendra Modi, the chief minister of Gujarat, as its prime ministerial candidate. He has a strong record of market-friendly reforms, but is also polarising and may have difficulty attracting coalition partners.
Although significant changes to economic policy are unlikely, important policies such as reducing subsidies on petroleum fuels and liberalising more sectors of the economy will take priority.
The prospect of a change in leadership has led to a bounce in the Indian stock market. The rupee spiked to a seven-month high as foreigners binged on Indian assets on the hearsay that the nation is likely to undergo a government change which will favour its economy.
However, investors should guard against the “messianic” effect, and should be wary that lofty electoral rhetoric does not necessarily translate into policy action. A new leader can only do as much as his or her legislature allows.
In South Africa, the country’s general election will be held on May 7. The ANC, which has been in power for the past 20 years, is expected to extend its rule but with a reduced majority. Issues relating to poverty, unemployment, workers’ rights, and service delivery are likely to be at the heart of the party’s campaign.
A lack of reform has left the country with weak infrastructure, frequent labour unrest, low investment and a big current account deficit. Growth last year slowed to 2 percent with many saying that the country now stands at an economic “T-junction”.
Standard & Poor’s (S&P’s) decision to downgrade Brazil’s sovereign credit rating to BBB- from BBB on March 24 provides an interesting backdrop to President Dilma Rousseff’s re-election campaign. The country’s once-booming economy is entering a fourth year of slowdown, with growth of around 2 percent expected this year.
Brazil will hold its presidential and parliamentary election on October 5 and, although the incumbent president is likely to be re-elected, the country’s politics have been thrown into turmoil by major protests in June last year over the cost of living and a range of other grievances. Mounting tensions between the ruling Workers’ Party and its chief coalition partner, the Brazilian Democratic Movement Party, have added an extra element of uncertainty.
The current situation is a far cry from 2010. As the West sank into a recession in the wake of the 2009 financial crisis, developing economies continued to post strong growth, helping to prevent the world economy from slipping into an even deeper and more painful downturn.
In India, a 7.5 percent gross domestic product growth rate was deemed to be on “autopilot” for the country, which was meant to be on the cusp of cashing in on a major demographic dividend. It posted an impressive 7.8 percent average growth rate between 2009 and 2011, according to S&P. But now, there are fears India could be trapped in a stagflationary environment as it continues to suffer from slow growth and high inflation.
Similarly, in Brazil the economy rebounded robustly in 2010 with 7.5 percent growth thanks to strong domestic demand and heavy government investment. However, since Rousseff took office in 2010, economic growth has limped along at 2 percent on average. The outlook for this year is not bright, either.
Last year South Africa’s economy, now the second-largest in Africa since Nigeria outpaced it earlier this month, grew at the slowest pace in more than four years. Consumer and business confidence in the economy remained close to record low levels in the fourth quarter.
While the economy is forecast to grow at the slowest pace this year since the 2009 recession, the Reserve Bank said there was no room for cutting interest rates as further rand weakness might fuel inflation.
Amid these elections, a number of common dynamics are playing out. Social discontent on the back of unresolved socio-economic issues is expected to persist, evidenced by a spate of protest action in each country.
Also, despite recent pullbacks, each country’s currency will remain vulnerable through this year as US Federal Reserve tapering continues. This situation will push inflation higher and filter through to growth this year. Fiscal consolidation will remain a core theme going forward, as governments scale up social expenditure to shore up their voter bases.
At present, the Indian, Brazilian and South African economies require structural changes, with priority being placed on bolstering macro fundamentals. Central banks are persevering with tight monetary policy with still high inflation. In addition to fiscal adjustment, rebalancing current account dynamics to attract capital inflows on a more sustainable level remains key to reducing external vulnerabilities and supporting exchange rate stability.
A great deal rests on the outcome of these general elections for investors, given the overriding sense of disillusionment associated with the ruling parties’ economic stewardship of their respective countries. For much of the past few years, these former engines of growth in the emerging market world have been in the doldrums, as governments have failed to deliver on their reform pledges and red-tape roadblocks to project execution have, if anything, increased.
Add into the mix major currency weakness and a series of damaging corruption scandals across the three countries, and it is clear that a strong and decisive government will be critical for each country to revive its medium-term economic prospects.
Ronak Gopaldas is a country risk analyst at Rand Merchant Bank.