BRICS: 2021 vs 2013: About Taper Tantrum and Economy of BRICS nations

Synopsis: The BRICS is better equipped to handle financial turbulence. Now, the focus must be on growth.

Introduction:

For two years, the focus of the BRICS has largely been on the economic impact of Covid. The BRICS nations are also concerned about when the US Fed will begin to taper its asset purchases again.

What is a Taper Tantrum?

After the 2007-2009 global financial crisis and recession, the US Federal Reserve started a bond-buying programme (known as quantitative easing) to infuse liquidity. With these funds, the investors started investing in global bonds and stocks.

In 2013, the US Federal Reserve decided to reduce (taper) its quantum of a bond-buying programme that led to a sudden sell-off in global bonds and stocks.

As a result, many emerging market economies, that received large capital inflows, suffered currency depreciation and outflows of capital. This is called globally as a ‘taper tantrum‘.

How the BRICS countries faced ‘Taper Tantrum’ in 2013?

China and Russia are Current Account Surplus(CAS) countries, while India, Brazil and South Africa are Current Account Deficit (CAD) economies.

During the 2013 Taper Tantrum, three of the “Fragile Five” – Brazil, India, South Africa – were BRICS economies. They witness unsustainability in external imbalances, “sudden stop” of capital inflows, created a sharp balance of payments pressures, wreaked havoc on the country’s currencies, and forced an abrupt tightening that hurt growth.

The 2013 “Taper Tantrum” started a multi-year trauma for these economies, resulting in local bond returns contracting 33% peak-to-trough across three years.

How things are different this time for BRICS countries?

Exports: Many BRICS economies are benefiting from strong exports.

Domestic demand in BRICS nations is also recovering slowly.

Current account deficit: It is estimated to be just 1% of GDP in 2021 as compared to 4.5% in 2013. Also, all BRICS-CAD (Brazil, India and South Africa) economies will be running “basic balance” (CAD+Foreign Direct Investment) surpluses in 2021 compared to large deficits in 2013.

Inflation: The BRICS nations were averaged 7% inflation for years when they were heading into 2013 taper. But, the Inflation is much lower than in 2013.

Foreign Reserves: Reserve Adequacy (foreign currency reserves to short-term debt and the current account) has improved in all BRICS-CAD economies compared to 2013.

Fiscal Deficit: In 2012, the fiscal deficit was 2% of GDP in BRICS economies. Before Covid, it was recorded almost 6% of GDP and then surged to 11% of GDP during the pandemic. So, there is a need to address fiscal and public debt pressures.

Where should be the focus on?

There is a need to focus on growth. It was seen as a slow-down before the pandemic and further pressured low because of the pandemic.

China may have reached upper-middle-income status and can broaden its macro objectives.

The other BRICS nations should prioritise lifting growth potentials. There is a need to create jobs, improve livelihoods and secure debt sustainability in a post-pandemic world.

Thus, there is a need to invest in infrastructure, health and education, financial sector, diversifying exports and increasing trade, exports etc

Source: This post is based on the article ”BRICS: 2021 vs 2013” published in Times of India on 14^th September 2021.