Some years ago, the research department at Goldman Sachs chose to distinguish four large emerging market economies, whom the GS team designated as “The BRICs”, i.e. Brazil, Russia, India and China. The acronym was part analytical insight, part marketing ploy. During the recent historical heyday of emerging market investing, the moniker caught on.

The meme, as it were, was meant to emphasize how dynamic each of these four countries was – so much so, that they could be bracketed together – and what a strong bet they would be for economic and market out performance.

The chart below draws a comparison among the four BRIC countries and offers some not necessarily intuitive distinctions among them. The column chart shows BRIC performance according to MMD’s Country Due Diligence comparative index measure, or the “C2D” index for short. This index offers a perspective on how open and amenable a country’s environment may be for creditors, hence “due diligence”.

The chart shows BRIC C2D index values from 2013 thru estimated values for 2020 and 2021. Note the C2D values for the last two years were estimated according to statistical trend analysis. Calculating the C2D index begs the question and offers the response as to whether real distinctions can be drawn among the BRICs.

We think the answer is yes, and we will elaborate briefly on why. But first, a quick description of the C2D: the C2D index is an equally weighted average of two qualitative indicators published by the World Bank. These indicators are the Depth of Credit Information index (0=low to 8=high), and the Strength of Legal Rights index (0=weak to 12=strong).

The former index measures the quality and extent of credit information available in a country’s credit markets; the later index gauges “the degree to which the collateral and bankruptcy laws protect the rights of borrowers and lenders…” Both indices are categorical, with higher grade scores indicating stronger levels.

For calculation of the C2D index, both of the underlying index values are normalized and reflect percentages of maximum possible levels. As noted, the normalized scores for the two underlying indicators are equally weighted and combined to generate the C2D value.

Surprisingly, we can see that C2D levels for both the Russian Federation and India (with its “licence raj” problems) appear to indicate a gradual and steady improvement of the C2D from 2013 through 2019. This would seem to indicate improving transparency and better legal recourse for creditors in these two markets. In contrast, C2D levels for both China and Brazil posted much lower.

What may be interesting and what may also be frustrating – for example, other indicators such as the World Bank’s own World Governance Indicators (WGI) highlight the very low level of resident confidence in Russian legal institutions. Actual conditions on the ground may contrast with new laws on the books reflected in the improving C2D levels. Due diligence is ever an ongoing process.

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