The Fab Five: South Africa Joins BRIC

By Brent Radcliffe | April 13, 2011 AAA

The BRIC countries – Brazil, Russia, India and China – often dominate headlines, and for good reason. With over 2.8 billion people between them (more than 40% of the world's population), the room for growth in these developing economies has businesses salivating at any opportunity to put their products in the hands of new consumers brimming with cash. Investors too have been watching these emerging economies as dominant forces in the next 50 years. The recent admission of South Africa gives the group presence on three continents (Africa, Asia and South America), as well as a looming presence in Eastern Europe, thanks to Russia. (For background information, also take a look at Understanding BRIC Investments.)
TUTORIAL: Exchange-Traded Funds

Not Quite Measuring Up
At first blush, South Africa seems like a strange addition to the group. It isn't ranked in the top 10 countries in terms of population as its fellow members are, its land area isn't as large, and its gross domestic product (GDP) is a quarter of Russia's ($1.45 trillion to $357 billion). It typically does not dominate news headlines, save for the 2010 World Cup. Some economists look at the addition of South Africa as a snub of Mexico, which has a much larger economy and a larger population. In terms of countries in Africa, South Africa isn't even expected to have the largest GDP by 2050 (that distinction goes to Nigeria). So why make the move now?

The move may be part of a greater BRIC strategy to get on the good side of a country in a rapidly developing continent, since Brazil, Russia, India and China all have economic ties to Africa that they want to entrench. The population in the Southern Africa region, in which South Africa is considered the gateway country, represents 20% of Africa's current total population of nearly 1 billion people. Among its peers, South Africa is considered to be the most developed country, has greater political stability and is considered less corrupt (according to Transparency International).

Importance of BRIC Membership
Being a member of the BRICS group offers developing economies a chance to meet to discuss problems and coordinate strategies. To a certain extent, the BRICS countries offer a counterweight to the G8, whose members have long been considered the most important and influential economies (Russia is also a member of the G8). According to the IMF, the combined GDP of the G8 in 2010 was $33.36 trillion; for BRICS, it was $11.33 trillion. The group is dominated by China, which many investors and economists consider the real driver. Without China's GDP used in the 2010 GDP calculation, the remaining BRIS is only 8% of the global economy.

As BRIC countries become more developed, their influence on the global market will continue to grow. The GDP growth of emerging and developing countries has outpaced both the world and advanced economies. BRICS countries make up 18% of a world economy estimated at $62.9 trillion in 2010, a significant jump from the 11% estimate in 2005. At the same time, G8 countries fell from an estimated 64% of world GDP in 2005, to 53% in 2010.

TUTORIAL: Risk and Diversification

Oil From a BRIC
BRICS countries tend to be rich in natural resources, especially oil. This has piqued the interest of global investors, as funds tracking BRICS countries have both geographic diversification and exposure to emerging market growth. While these funds have outpaced those focusing on developed economies, they are also riskier because a significant portion of BRICS economies are focused on natural resource exploration. While the demand for oil and natural gas (major export commodities for Russia) is high now, the movement towards alternative energy threatens the limitless demand that some countries anticipate.

With the addition of South Africa, the world can expect BRICS gang to dominate headlines for decades to come, but everything may not be as it seems. When GDP figures are examined on a per capita basis, China and Brazil are not part of the "rich club" – they are considered upper-middle income; India is considered a lower middle income. Additionally, the threat of inflation may cause their central banks to put on the brakes.

The Bottom Line
While South Africa's addition to the club may be considered premature by some analysts, it is clear that emerging markets will continue to play an important role in the world economy. As exporters of commodities to the rich world and importers of goods made by more developed countries, BRICS represent a giant influx of both industrial workers and cash-flush consumers. (For additional reading, also see Forget BRIC, It's Time For CIVETS.)

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