Encouraged by the growing shift in the balance of economic power between developed and emerging economies, BRICS member countries are pushing ahead for the establishment of their own development bank. This is in addition to a planned bailout fund the bloc is considering, which would be supported by foreign reserves of what some estimate are up to US$4 trillion. BRICS members are Brazil, Russia, India, China and South Africa.
“… the development bank is necessary as demand for funding in BRICS countries and other emerging economies will continue to be high, as these countries have pent-up demand to rehabilitate and build new infrastructure, such as roads, power and water utilities.”
Details of the funding, structure and mandate of the development bank have been sketchy, although its establishment was endorsed by the leaders of the BRICS countries who at their last summit in India, March 2012, mandated that a joint working group be established to study the feasibility of its establishment.
The leaders want the institution to mobilise funding for infrastructure and sustainable development projects in the BRICS countries and other emerging economies and developing countries. They also want it to play a key role in promoting intra-BRICS investment, economic growth and intra-BRICS trade, which currently exceeds US$230 billion and is projected to exceed US$500 billion by 2015.
The development bank is being seen as a direct challenge to the perceived stranglehold of the World Bank and the International Monetary Fund over the provision of development finance to developing and emerging economies.
But a South African-based diplomat downplays the political significance of establishing the bank. “I see the bank as more of a realisation of the economic power within the BRICS countries and the potential of their economies to support global economic growth, particularly after what happened after the last credit crisis,” he says. “However, we should not be oblivious to the political rivalry between the United States and some of the BRICS member countries like Russia and China,” the diplomat says.
The BRICS leadership would have to define the relationship between the BRICS Bank., the large banking institutions, development finance institutions and other existing institutions in such areas as focus, model of financing and clients.
Analysts and bankers have mixed views about the need and role of a BRICS development bank.
First National Bank CEO Michael Jordaan says a BRICS bank will send a strong signal to the rest of the world that there is co-operation between BRICS countries which has been mostly “theoretical” in the past.
According to Nedbank CEO Mike Brown, the establishment of a BRICS development bank is being motivated by concerns about the World Bank’s hegemony and the influence of the US and Europe in the World Bank’s operations and decision-making processes.
Brown says BRICS countries may also have felt that developing countries could be more vulnerable during “periods of heightened developed country needs,” such as during the last global and eurozone crises. Benefits will be varied, he says, citing the ability of BRICS countries to tap into new and potentially cheaper sources of funds for development projects when acting together.
Jordaan says there are merits in establishing the development bank. This is because of the growing significance of the BRICS bloc in the global economy, based on estimates by economists showing that BRICS economies now account for about 40% of global GDP.
“In terms of rallying international decision-makers for the benefit of the BRICS nations and channelling foreign direct investment into developing nations in a more focused way, I would be supportive of this move,” Jordaan says. He says the benefits of a BRICS bank lie in the unity of the governments of Brazil, Russia, India, China and South Africa in coming together and forming a bank that will benefit each participant, and developing countries outside of the BRICS fold.
“It may be that this kind of sharing is far more effective than each country going [at] it alone. There are likely to be synergies and learning opportunities for us from these large economies, which could be enormously beneficial to the country and to the continent,” he says.
FNB’s support for a BRICS development bank is not surprising. Its holding company – FirstRand – already actively participates in the banking markets in seven African countries, with prospects in Ghana and a merchant banking license in Nigeria. “FirstRand also now has a presence in Mumbai, India. The China and India corridor flow of funds is critical in growing these African economies. As a group, we are therefore supportive of the South African government’s involvement in collaboration with the other BRIC countries to form a centre for banking expertise and investment into these developing countries,” Jordaan says.
Jordaan warns of potential drawbacks, citing tensions that can come from the fact that the bank will have five partners with varying strength and purchasing power. He sketches a scenario where hypothetically China and India – because of their large economies relative to those of other BRCIS countries – may be required to contribute more on a pro-rata basis if further capital was required. This can potentially shift the decision-making power within the bank to the highest contributors.
“The benefits of a BRICS bank lie in the unity of the governments of Brazil, Russia, India, China and South Africa in coming together and forming a bank that will benefit each participant, and developing countries outside of the BRICS fold.”
“It will be important for South Africa to play an assertive role and to manage the power and strength of the other partners as they rally international decision-makers for their mutual benefit,” Jordaan says. “The BRICS bank shareholders will need to get their heads around the need to make development of these five nations a priority, over and above being highly profitable. The goal here must be the benefit of each country, rather than purely a profit motive,” he says.
Adrian Cloete, an equity analyst at Cape Town-based Cadiz Asset Management says a BRICS development bank is required because the bloc’s member countries and other emerging economies still require significant amounts of development capital.
He notes that global sources of capital, particularly for long-term capital projects, are becoming more difficult to find owing to the impact of the last global financial crisis which has sapped the appetite for lenders to provide funding. This has been worsened by demands by regulators for banks to hold additional capital buffers against loans under the Basel III, which became effective from January 2013 and will be implemented in phases until 2019.
Cloete says one can argue that the development bank is necessary as demand for funding in BRICS countries and other emerging economies will continue to be high, as these countries have pent-up demand to rehabilitate and build new infrastructure, such as roads, power and water utilities.
“BRICS member countries will require development capital for long-term projects like infrastructure projects in the power, water, utilities and transport infrastructure (railways, roads, and so forth),” says Cloete. “A BRICS development bank could be one source of funding for these types of projects. An example would be to develop a railway line to transport iron ore that could be exported to China,” says Cloete.
Cloete says South Africa should benefit from the institution. “It would be important to ensure that South Africa and other African projects get their fair share of the BRICS development bank project funding, so that infrastructure development in Africa keeps pace with the rest of the BRICSA members,” Cloete says.
Brown adds that benefits for South Africa and Africa would be access to new funds, probably in cooperation with local and regional institutions such as AfDB.
“Possible drawbacks might be the conditionality attached to loans (using BRICS service providers), as well as the cost and complexity of another institution when all these areas have existing development banks. Much will depend on the final detail of its constitution,” Brown concluded.