The BRICS bank: Is it a game-changer?
FIRST proposed in 2012, the New Development Bank BRICS (NDB BRICS), formerly referred to as the BRICS Development Bank, was launched this past week in Shanghai, China following years of extensive negotiations over headquarters location, leadership and funding. The institution is a multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing Us-dominated World Bank and International Monetary Fund. The NDB is to be headed by a rotating five-year term leadership with the first president, Kundapur Vaman Kamath, coming from India. While the founding members of the NDB are the BRICS states, membership is open to members of the United Nations subject to the bank’s board of governors’ “special majority”.
The objective of the NDB is to boost infrastructure funding in the emerging economies, with a focus on the BRICS states, by offering tailor-made funding solutions without some of the onerous conditions typically placed by the two Bretton Woods institutions. The biggest contributor to the bank is the world’s second largest economy, China, which is expected to dominate the institution. China has also led the recent establishment of another new international development bank, the Beijingbased Asian Infrastructure Investment Bank (AIIB). AIIB has China as its largest shareholder with 30% shareholding. While the move by China in both development financial institutions has been seen as consolidating its position as a superpower, the Chinese finance minister has downplayed this, asserting during the NDB’S opening ceremony that “the NDB will supplement the existing international financial system in a healthy way and explore innovations in governance models”. The NDB is headquartered in Shanghai and has its first regional office in Johannesburg.
The bank is to start out with a capital base of $50 billion with each member country contributing $10 billion and having equal voting rights. The capitalisation is to be doubled to $100 billion in the coming years. The members will also establish a reserve currency pool worth another $100 billion to help avoid currency crises arising from short-term liquidity pressures. China has pledged to contribute $41 billion while Brazil, India and Russia will each contribute $18 billion, with South Africa set to contribute $5 billion to this pool. The central banks of the BRICS would draw from the pool whenever they experience a shortage of dollar liquidity, helping them to stabilise their financial systems.
BRICS nations, with 42,6% of the world’s total population and roughly one third of the world’s land area, have a combined GDP accounting for about one fifth of the world’s total. While the idea of the BRICS countries wanting to help with the development of other emerging nations is a noble one, each of the BRICS countries is individually grappling with its own economic issues. In Africa where most of the help is needed, there are not that many countries that can be technically classified as emerging economies. Emerging countries can be thought of as countries that reflect high economic growth rates supported by increasing industrialisation that sees them become important manufacturing bases for global manufacturing operations. Most emerging economies have moved away from being led by primary sectors such as agriculture and fisheries and typically show increasing exports of industrially manufactured goods. Many of the African countries are yet to reach this stage but have massive infrastructure requirements. The infrastructure funding gap is also part of the reasons holding these countries back from making the transition into truly emerging economies.
The business of lending money to infrastructure projects is not as easy as it may sound given the large quantum and the long-term nature of the funding requirement. Development finance institutions often spend a great deal of time and effort in structuring these deals that are bankable by securing some sort of cash flow generation from the funded infrastructure. Usually, investment in such infrastructure is often counter-cyclical; that is, it is usually a “build it and they will come” approach. Loans for such infrastructure often come attached with several conditions and normally require guarantees from the state that are evaluated on the basis of the sovereign’s ability to repay funds in the worst case scenario. It seems clear, however, that the NDB and similar institutions such as the AIIB combined, will be disruptive to the World Bank and IMF by providing borrowing nations with more funding options. As to whether the NDB, on its own, will become a game-changer in terms of how infrastructure funding is provided to emerging economies remains to be seen.
Notwithstanding the start-up issues fac- ing the NDB, which is expected to provide its first loan early next year, the new bank has the ability to forge closer ties with other development finance institutions, such as the Japanese led Asian Development Bank and China-led AIIB, the African Development Bank and South African governmentfunded Development Bank of Southern Africa. The institutions can share operational experience and co-finance infrastructure funding in some of the countries that require extensive on-the-ground knowledge or where there are significant risks that need to be shared. Co-operation among these institutions can lead to a reduction in funding bottlenecks and help in the devel- opment of more innovative funding solutions that can result in speedier and more sustained economic growth.
Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest. co.za