Washington - David Loevinger, a former senior US Treasury official, says recollections of the Chiang Mai Initiative flashed through his mind when Brazil, Russia, India, China and South Africa unveiled plans for a $100 billion (R1 trillion) Brics emergency fund last week.
In the 13 years since Asian countries created what they called an alternative to the International Monetary Fund (IMF) by pooling $240bn to help support their currencies, not a penny has been drawn from the Chiang Mai.
“It’s easy to announce the intention,” says Loevinger, an emerging markets analyst at TCW Group. “It’s more difficult to make them operational.”
The South African, Indian and Brazilian currencies are among the six worst performers in emerging markets this year as a surge in US bond yields lures away the investment the countries need to finance their current account deficits.
The Brics nations pledged on September 5 to create the fund, named the Contingency Reserve Arrangement, to shield themselves from “unintended negative spillovers” from monetary policies in advanced economies.
But implementation of the fund may be undone by central bankers’ aversion to taking on risk, particularly as investors flee developing nation assets, according to Loevinger.
Citigroup, which expects the fund to follow the guidelines used by Chiang Mai, estimates that each country will have access to only $8bn before needing IMF backing for further funds. That figure is about 7 percent of India’s foreign reserves and less than the country’s own contribution of $18bn to the pool. It represents 2 percent of Brazil’s $373bn reserves, which the country has yet to use in defence of its real.
China, which holds $3.5 trillion in foreign reserves, will contribute $41bn. Russia, India and Brazil will each put up $18bn while South Africa will provide $5bn. The fund represents 2.2 percent of the total Brics reserves of $4.3 trillion.
The fund, which may start operating by 2015, “is not designed to address the current situation”, Carlos Cozendey, the secretary for international affairs at Brazil’s finance ministry, said this week.
The programme “will be helpful as a buffer to face problems in balance of payments” without seeking to defend exchange rate levels, he said.
South Africa’s Treasury spokesman, Jabulani Sikhakhane, declined to comment on whether the fund was big enough to counter the sell-off in emerging market currencies.
Vivienne Taberer, a fund manager at Investec Asset Management, said the fund might help boost investor confidence by giving countries another tool to defend their currencies.
“The important thing here is it’s a sign of co-ordination and working together in putting something in place,” Taberer said. “If you’re going to use these types of lines to fight something that is fundamentally justified, then you’re not going to win the battle.”
Japan, China and South Korea led the creation of the Chiang Mai Initiative following the Asian financial crisis in 1997. In an effort to control lending, members had unconditional access to only 30 percent of their quota, with implementation of IMF-imposed reforms needed to tap the rest.
“I doubt the Brics funding will be a free cheque,” said Frederic Neumann, a researcher at HSBC Holdings in Hong Kong. “Lending will have strings attached, which is intolerable to receiving countries.” – Bloomberg