Magazine issues » Summer 2013

INSIDE VIEW: Don’t bank on the Brics

Cape TownThe Brics Bank has become something of a flagship issue for the newest member, South Africa, whose role alongside its more muscular bedfellows has raised eyebrows. Andre Roux and Malan Rietveld of Investec Asset Management investigate.

The Brics Bank has been punted as one of the most tangible possible outcomes of what has, up to now, been a largely symbolic economic alliance between the rising emerging market powerhouses of Brazil, Russia, India and China.

Discussions around what shape such an institution might take dominated the recent Brics summit in South Africa.

Indeed, it has become something of a flagship issue for the newest member of the club, South Africa, whose role alongside its more muscular bedfellows has raised eyebrows.
What South Africa adds is greater credibility and clout in accessing the increasingly evident African growth story.

This would presumably be a major area of investment for the Brics Bank and the sophistication of its financial system and institutions.

However, despite the hype, the Brics Bank remains stalled in the driveway. To understand why, we need to take a step back and examine the origins of the idea, taking a less romantic view of the inner workings of the Brics group.

The idea of the Brics Bank originated in two parallel recent developments around the financing of long-term infrastructure and developmental needs.

First, South Africa and China were in talks to establish a bilateral lending institution for African investment, most probably co-ordinated by the Development Bank of Southern Africa and the China Development Bank, with the possible participation of other African governments, notably Ethiopia.

The idea was that China would improve the public relations element of its investment on the continent by drawing on the clout and credibility of South Africa.

At the same time, South Africa and other African partners would demonstrate leadership in securing additional investment on the continent. The basic logic of the partnership was clear: the African countries would bring local knowledge and credibility to the table, and Beijing the capital.

Meanwhile, the creation of a new institution built on South-South co-operation was being championed by a group of influential academics, including Joseph Stiglitz and Nick
Stern, both former World Bank chief economists.

Their main point was that the Washington institutions are no longer up to the task of funding development in the 21st century.

First, the likes of the World Bank and the regional development banks are too conservative with their lending-based approach, where long-term investment requires funders who are willing to take equity stakes and have real “skin in the game”.

Second, their appetite for regional investments that traverse national borders is limited when, in fact, better connected regional infrastructure is exactly what the developing world needs.

Third, the World Bank and even the regional development banks are beholden to the demands of their funders – almost exclusively from the advanced economies – who set unreasonable demands for project approvals, particularly with their insistence on conditionality, transparency and good governance.

Eventually, the increasing visible Brics forum became the natural home for this institution that would be unshackled from Western dominance.

The move would also send a powerful message to the West that, in the absence of reforms that give the world’s rising powers a greater say in how the Bretton Woods institutions are run, the emerging markets would simply go their own way.

Hence the idea of the Brics Bank, which put bilateral negotiations between member countries on the back-burner.

It is fair to say the idea has suffered complications from the beginning. The move away from bilateral negotiations has brought a complex set of political dynamics to the fore.

The most significant centre on the size and allocation of funding contributions between the Brics, and the related issue of the institutions’ own governance and decision-making structures.

The initial proposal was for the bank to receive $50 billion in funding capital and a one-to-one leverage ratio so that some $100 billion in capital could be deployed.

The contributions to this capital would be scaled roughly according to the size of the Brics countries’ economies. This would have meant that China would stump up between 40% and 50% of the bank’s initial capital, with India, Russia and Brazil each contributing around 15% and South Africa making up the balance.

However, some member countries raised concerns over the dominance China would exert over the institution under this arrangement.

Instead, they argue, contributions should be more or less equal, with each country contributing about 20% of the capital. This was broadly acceptable to the likes of Brazil and India, for whom an increase in contribution from, say, 15% to 20% was negligible.

For an extra $2.5 billion they could ensure a more even-handed structure for the bank governance. However, an equal-weighted contribution structure was more problematic for Russia and South Africa.

The former, it is safe to say, was never highly enthusiastic about committing funds to long-term investments in Africa – where it has considerably less interest than the other Brics members.

Moving from GDP to equal-weighted contribution could result in an increase from 13% to 20% for Russia – which seemed a step too far for a project for which Moscow’s enthusiasm was, at best, lukewarm.

For South Africa, a $10 billion contribution would be a major undertaking, probably requiring a form of borrowing.  

For now, discussions around the Brics Bank are mired in difficult trade-offs around the size of member contributions, the internal power dynamics of the group and how this would be reflected in the structures of the bank.

These issues are not insurmountable, but will take time to resolve. Insiders suggest the group still intends to have the bank legally constituted at the next Brics summit.

That timeline is likely to prove overly optimistic. Lengthy delays or even failure to arrive at an agreement on substantive issues should serve to temper expectations around the ability of the Brics to take collective action.

There is a place for a major new player in the global development finance architecture, but the road leading to its consummation could be a long and winding one.

Andre Roux is co-head of fixed income, and Malan Rietveld is a research analyst at Investec Asset Management

©2013 funds global asia

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