Brasilia - The leaders of five of the world’s largest emerging markets will showcase a new currency reserve fund and development bank this week.
Critics say neither is enough to revive the group’s waning clout.
Brazil, Russia, India, China and South Africa, known as the Brics, will approve the creation for the $100 billion (R1.1 trillion) reserve fund and $50 billion bank at a July 15-16 summit in Brazil’s coastal city of Fortaleza and the capital Brasilia.
The initiatives are born out of frustration with a lack of participation in global governance, particularly in the World Bank and International Monetary Fund, said Arvind Subramanian, senior fellow at the Peterson Institute for International Economics.
The measures aren’t big enough to boost growth or cohesion in the group as foreign investor sentiment sours and member states focus on issues close to home, such as Brazil’s elections, the conflict in Ukraine and new economic policy plans in India.
“It’s hard to see a lot of impetus at this stage for the Brics in general and for these initiatives in particular,” Subramanian said by telephone from Washington.
“There’s going to be a lot of attention on domestic issues.”
Economic growth in the five countries is projected to average 5.37 percent this year, half the pace seen seven years ago, according to the median estimate of economists surveyed by Bloomberg.
Brazil and Russia will grow 1.3 percent and 0.5 percent, respectively.
Yuri Ushakov, Russian presidential aide on foreign policy, said in an interview that the group’s growth rate is still above that of the global average and that its economic and political weight is increasing.
The Brics have evolved from the original term coined in 2001 by then-Goldman Sachs economist Jim O’Neill to describe the growing weight of the largest emerging markets in the global economy.
In 2011, South Africa joined to give the Brics a broader geographic representation.
The group’s track record in pursuing a common agenda on the world stage has been mixed.
“It’s easier to say what the Brics aren’t than what they are,” said Jose Alfredo Graca Lima, under-secretary for political affairs at the Brazilian Foreign Ministry.
The five countries failed to agree on a candidate to head the World Bank in 2012 and the International Monetary Fund in 2011, two posts at the heart of their demands for more say in global economic matters.
The summit is unlikely to provide a common front to push ahead global trade talks either, even though the World Trade Organization is headed by Brazilian Roberto Azevedo.
Brazil itself has increased protectionist measures under President Dilma Rousseff.
“I wouldn’t say that there will be a common outcome in that sense, but certainly there will be discussion on WTO matters,” said Sujata Mehta, secretary for economic relations at the Indian Foreign Ministry.
India and South Africa have signaled they may backtrack on a trade facilitation agreement reached at the WTO talks in Bali in December 2013, wrote Carlos Braga and Jean-Pierre Lehmann, professors at Lausanne, Switzerland-based IMD business school.
Still, Indian Prime Minister Narendra Modi is unlikely to rock the boat at the Brazil summit, said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a government-backed research institute in New Delhi.
“Domestic issues are dominating his agenda, especially growth and inflation,” Bhanumurthy said.
Russia expects Brics leaders to discuss international issues, including the situation in Ukraine, and speak out against “sanction pressure,” Ushakov told reporters July 10.
All Brics members except for Russia abstained from a UN vote that called on states not to recognise Crimea’s autonomy from Ukraine.
Rousseff yesterday hosted a luncheon for leaders watching the World Cup final in Rio de Janeiro, including Russia’s Vladimir Putin and Germany’s Angela Merkel.
The new development bank, which won’t impose policy requirements on borrowers, will help fill fast-growing infrastructure financing needs, said Kevin Gallagher, professor of international relations at Boston University.
The Brics can also use it to pressure developed countries, particularly the US, to advance stalled measures to make global financial institutions more equitable, he said.
“They can say, ‘look, we have an alternative,’” Gallagher said in a phone interview.
“It gives you a lot of political leverage.”
With an expected startup capital of $50 billion financed equally by the five members, the bank could lend $3.4 billion per year in a decade, according to a March study by the United Nations Conference on Trade and Development.
That compares with the $61 billion the World Bank expects to lend this year.
The bank will require legislative approval from member countries and at least one year to be implemented.
It will eventually open membership to non-Brics countries and coincides with plans for an Asian infrastructure development bank spearheaded by Beijing, according to an official at the Brazilian Finance Ministry, who requested not to be named because he’s not authorised to speak publicly on the matter.
The Brics bank, along with the separate $50 billion Asian infrastructure bank, is another way for China to get higher returns on its $3.9 trillion reserves than it does from buying US Treasuries, said Oliver Rui, professor of finance and accounting at the China Europe International Business School in Shanghai, the favourite city to headquarter the bank.
Multilateral lending agencies are also a way for Beijing to legitimise investments abroad, after nationalistic backlashes in Africa against Chinese investment, said Subramanian.
China’s Finance Ministry did not respond to faxed questions for comment about the Brics bank.
China will also fund $41 billion of the currency reserve agreement, which member countries will be able to tap in case of balance of payment deficits.
South Africa will earmark $5 billion of its reserves and the remaining countries will set aside $18 billion each.
Details on the functioning of the $100 billion agreement, which amounts to 2 percent of the Brics’ pooled reserves, have yet to be worked out.
The Brazilian real is the second-best performer this year with a 6.35 percent gain, and the rand the second-worst among 16 major currencies tracked by Bloomberg with a 2 percent loss.
The rupee has gained 3.1 percent and the ruble has lost 3.95 percent.
Each country would have a limited amount of cash it could draw on from the currency reserve, and lenders have an opt-out clause, allowing them to drop out of the agreement any time, according to the Brazilian official.
“There are many unanswered questions still,” said Domenico Lombardi, director of global economy at the Waterloo, Ontario-based Centre for International Governance Innovation. said in a telephone interview.
“The measures are more symbolic, designed to show they have alternative instruments to the IMF and World Bank.” - Bloomberg News