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As the financial crisis continues to roil credit and stock markets around the globe, it seems that no country or continent is being spared the consequences. Brazil, Russia, India and China — the BRIC countries — are no exception. In this Knowledge@Wharton podcast, Shiv Khemka, vice chairman of SUN Group, based in London, New Delhi and Moscow; Silas K.F. Chou, president and CEO of Novel Holdings, based in Hong Kong; and Odemiro Fonseca, founder of Viena Rio Restaurantes in Rio de Janeiro, discuss their countries’ response to the crisis, its impact on specific sectors, the decoupling hypothesis and the dangers of protectionism, among other topics.
An edited transcript of the conversation follows.
Knowledge@Wharton: To begin with, I would like to talk a little bit about the economic situation in each of the countries that you belong to and how it has been affected by the ongoing world economic crisis. Shiv, would you like to start us off?
Khemka: I belong to India. 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. In terms of the country I work in — Russia — again, 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.
Knowledge@Wharton: How about the situation in China?
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. Of course, as the crisis develops now in the West, [things are getting] kind of out of hand. This affects everybody. So we hope that the United States and Europe are [exercising] strong leadership to solve the crisis in a quick and sensible way.
Knowledge@Wharton: How about Brazil?
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. And the banks that are financing cars for 60 months now are offering credit for 30 months. So the credit market’s much tighter. I think some specific industries are going to take a beating, like the car industry. But we do not forecast a recession. We are going to have less growth, maybe, on the order of 4% this year as compared to 5.3% last year.
Knowledge@Wharton: To the point that Odemiro made — 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. The savings that the Russians have wisely made over the last few years need to be now invested thoughtfully in the future. But given the strong commodity base, and the lack of adequate diversification of the Russian economy, I think all the focus will be on the commodities sector. Energy and mining.
Knowledge@Wharton: What about 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. This is a good chance for China to test that. Of course, we cannot afford to prolong the recession or depression in the Western world. That would cut off our lifeline. So hopefully this recession in the West will be brief. Then it’s really a good opportunity for China. On the other hand, the Chinese real estate market has been severely affected, but [that, too] is also welcome. The government had been trying for the last two years to cool down real estate prices, which have been out of the reach of the common people. So, we still look at it as an opportunity for us to adjust our economy … for future growth.
Knowledge@Wharton: Speaking of the role of the government, could you help our audience understand how the government has responded to the crisis in the countries we’re talking about? And what do you think about the nature of those responses? Odemiro, do you want to start us off?
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. Silas?
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.
Knowledge@Wharton: What do you think, Shiv?
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. I think the government has really been very proactive and done an excellent job projecting a clear plan and implementing the beginnings of that plan. The beginnings of liquidity started flowing this week into the economy.
Knowledge@Wharton: There used to be a hypothesis that was very popular a while ago, called the decoupling hypothesis, which said that — especially in the BRIC economies and emerging markets more broadly — growth could be sustained even in the absence of growth in the developed world. Given what’s going on, how realistic do you think that view was? Any comments on that?
Khemka: The world is increasingly interconnected. Of course, there are some places, perhaps — such as rural societies and local microeconomies that are relatively unconnected. But if you really look at the big economies in the world today, they are increasingly connected through human capital, through knowledge, through information technology, capital flows and many other things. In a world where the U.S. is such a dominant part of the global economy, it is unrealistic to think of a decoupled economy. However, the comments that underlie some of the thinking on decoupling are that economies have their domestic markets that are quite large — like India and China. And those markets are starting to grow. There is increased domestic capital, consumer spending power and so on. I think there is some truth in that, and that’s the reason why economies like India, China, Brazil and others will continue to grow. The growth rate will decline, which will have potentially a very significant impact on long-term performance of those economies. But there is growth in those economies. So to that extent, it is, to some extent, decoupled.
Knowledge@Wharton: Silas and Odemiro, any comments?
Chou: I agree with this point of view. But the thing to add is, the economies of China and India — even Brazil, but especially China and India — are on a very low base. So if the West doesn’t grow that much, China and India still will grow, because the per capita income in China is less than $5,000. India is maybe $3,000. So there are great prospects for growth still in China and India, despite possible recessions in the west.
Fonseca: Clearly there is no decoupling of the capital markets. The fundamentals of Brazil haven’t changed, but the stock market declines at 40%. The credit market stopped. So there is no decoupling in the capital markets, in the financial markets, even for a country as isolated as Brazil. Unfortunately, there will be decoupling for the wrong reason for Brazil, because 94% of what is consumed in Brazil is produced in Brazil. So Brazil is very isolated. I would like there to be no decoupling for Brazil. But there will be, because Brazil is much smaller, and has much lower per capita income. And it’s going to grow less. It will look like decoupling, but for the wrong reason. I’d like to export 20% of the GDP of Brazil to the United States. [Laughter]
Knowledge@Wharton: What is the one development that you most fear occurring that would prolong the crisis in your country?
Fonseca: The wrong development is what our president is saying — that we are Iceland — [that] we are an island. That’s the wrong development. Trying to protect Brazil against so-called speculation, or trying to start again to buy commodities to support prices — something that we don’t do any more in Brazil, but we did for 50 years, buying commodities to support prices. All this kind of thing is the wrong thing. Trying to protect the commodities, trying to raise the barriers for imports. It will be dangerous.
Chou: Exactly. Protectionism. If the United States, for whatever reasons, turns inward for total isolation, protectionism, that would be bad news for the world. Because we are really living in a global village. Everybody is interdependent.
Khemka: I completely agree. If one raises high walls right now in the world in different countries, it will only create and exacerbate the problem. I also think in Russia, particularly, it’s very important that the government has policies that are equitable across the board. There’s a lot of inequity in the policies and sort of favoritism, and so on — I think that will also send the wrong signal.
Knowledge@Wharton: One last question for each of you. What is your most optimistic, and also your most pessimistic, scenario for the next one year?
Khemka: I don’t have an optimistic scenario, I’m afraid. I think that one has to batten down the hatches and prepare for a thunderstorm. One needs to be realistic … and prudent in this environment. I think that what was a financial crisis is becoming an economic crisis, has perhaps become a crisis of confidence. One needs to take that very seriously, and one needs to have patience. The key right now is survival.
Chou: Optimistic is that this can be over in two quarters. Pessimistic is it can go to two years and is really bad. For two quarters, I can escape this relatively unscratched. For two years, China would be in deep trouble.
Fonseca: I’m optimistic for one new reason. The central bankers, the Treasury Department — they are working together in all countries at the same time. I was surprised reading today in the newspaper that the Treasury Secretary of the United States, Paulson, and his staff speak with the Treasury Department of China every day. That’s quite new…. If this stops the panic, I think we’re going to go through this with a mild recession in the United States. And Brazil and China are going to survive. Of course, if the panic continues and you have oil declining more and more, you’re going to see problems in Russia. You’re going to see problems in the Middle East. You’re going to see problems in Venezuela. You’re going to see much more unrest. But if they stop the panic, and this cooperation helps — I’m very optimistic.
Knowledge@Wharton: Gentlemen, thank you very much for joining us today.