By Yaroslav Lissovolik

The stimulus unleashed by China provided a major boost to China’s market indexes, raising hopes that the country’s target of 5% growth this year could still be within reach. Amid this elation there are cautionary voices that point to the insufficiency of stimulus measures as well as the need for fiscal policy to deliver more targeted support to the economy. The use of the fiscal policy instruments, however, was earlier limited by concerns over the implications for China’s debt-accumulation, a vulnerability that is also observed across most of the other BRICS economies. Indeed, the recent pattern has been that the macroeconomic policy mix in BRICS economies was characterized by a relatively stringent monetary policy stance that compensates for the excesses in fiscal spending or the lack of fiscal maneuver due to high debt levels. Going forward, greater scope for rate cuts may be secured via stronger fiscal performance and structural adjustment. There may also be room for closer macroeconomic policy coordination among the BRICS-5 to further enhance the quality of the macroeconomic policy mix.

Across BRICS-5 two Central Banks – the People’s Bank of China (PBOC) and the South African Reserve Bank – have undertaken milestone policy rate cuts. In China the PBOC cut the rate of the medium-term lending facility to 2% from 2.3% – the biggest reduction since 2016 when China’s monetary authorities started using the monetary tool to guide market interest rates. The People’s Bank of China also cut the reserve requirement ratio for banks by 50 basis points, slashed down payments for second homes, and provided 1 trillion yuan of long-term funds. These measures while successful in boosting market confidence in the short-term also sparked discussions on the expediency of additional measures most notably on the fiscal front. Notwithstanding earlier reluctance to resort to sizeable fiscal expansion in view of the need to reach the 3% of GDP deficit target and debt-related concerns, the Chinese authorities later declared that additional fiscal spending would be forthcoming to boost growth.

In South Africa the Central Bank reduced its key interest rate by 25 bps to 8% on September 19, 2024, after seven consecutive meetings of keeping the rate at a 15-year peak of 8.25%. Rate cuts throughout 2024 were delayed amid concerns about elevated deficit levels driving up the country’s already high debt levels. In attempting to stabilize the debt-to GDP ratio the government managed to secure a primary surplus of 0.4% of GDP in the year to end-March 2024 – this was the first time that South Africa managed to record a primary surplus in the last 15 years. Thereafter the primary deficit reached 0.5% of GDP in the first quarter of fiscal 2024/25 — higher than the figure recorded in the same period of the previous fiscal year.

Against the backdrop of monetary policy loosening in China and South Africa other BRICS economies resorted to key policy rate increases. In Russia the key policy rate of the CBR was raised by 100 basis points to 19% to counter inflationary pressures stoked by higher fiscal spending. In Brazil the Central Bank raised its Selic rate by 25 bps to 10.75% in its September 2024 meeting on the back of mounting market jitters concerning the country’s weakening fiscal and debt position.

In India the authorities have been targeting the level of the budget deficit at 3% of GDP, but the target was missed in the last several years, with the federal government aiming to bring the fiscal deficit to 4.9% of GDP in the year ending March 2025 and to below 4.5% by March 2026. Given the overshooting of the fiscal deficit target and the scope to reduce the debt-to-GDP ratio via high rates of economic growth, India opted to focus on the debt-to-GDP ratio as the new fiscal target: “We were moving away from this fiscal deficit targeting sort of framework, where after 2026 we will look at debt-to-GDP ratio as an anchor,” declared T.V. Somanathan, India’s finance secretary at the Ministry of Finance.

On the monetary policy side India’s Monetary Policy Committee (MPC), kept the repo rate unchanged at 6.50% for a ninth straight policy meeting. Accordingly, the monetary policy stance was kept at ‘withdrawal of accommodation’ reflecting MPC’s focus on bringing inflation towards its 4% target.

The main conclusions from the above snapshots of the monetary and fiscal positions across BRICS-5 are that: there are notable differences in the macroeconomic policy mix, including in the direction of monetary policy; fiscal rules and targets need to be reinforced across BRICS, as is reflected in the revision of targets/rules and the relatively high fiscal gaps; monetary policy tends to compensate for the weaknesses in fiscal policy in dealing with inflation and the attainment of broader macroeconomic stability. And while the loosening of monetary policy in China was facilitated in part by the onset of Fed rate reductions, additional room for monetary maneuver can come from improved fiscal performance and structural adjustment.

With the fiscal side of the macroeconomic policy mix being the most problematic among the BRICS economies, there may be a need for BRICS/BRICS+ members to hold discussions on the exchange in macroeconomic policy best practices, most notably with respect to the use of fiscal rules. With time this may involve the formulation of fiscal rule levels for budget deficits and public debt dynamics that could serve as a reference for BRICS economies. On the monetary policy side there is scope to conduct consultations around the key turning points in the global monetary conditions, including during the onset of the easing cycle in Fed’s monetary policy.

In the longer term, there may be a case for exploring the potential for coordinated BRICS stimuli, exploiting the growing trading volumes across core the bloc’s members as well as more broadly across the South-South axis. The increasing trade turnover between China and its BRICS trading partners strengthens the transmission mechanisms within the Global South realm, including for China’s own growth potential. As could be the case with the G20 coordinated measures to boost global growth, coordinated stimuli across BRICS+/Global South could be amplified by the involvement of MDBs, regional financing arrangements and regional development banks from the developing world. BRICS economies also need to explore the scope for trade liberalization and other coordinated structural measures, providing thus a boost to growth beyond the effects of monetary and fiscal policy easing.

Yaroslav Lissovolik – Founder of BRICS+ Analytics.

BRICS+ Analytics