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By Mike Cohen & Ilya Arkhipov - Mar 26, 2013 2:36 PM GMT+0100
The biggest emerging markets are uniting to tackle under-development and
currency volatility with plans to set up institutions that encroach on the
roles of the World Bank and International Monetary Fund.
The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and
South Africa -- are set to approve the establishment of a new development bank
during an annual summit that began today in the eastern South African city of
Durban, officials from all five nations say. They will also discuss pooling
foreign-currency reserves to ward off balance of payments or currency crises.
The deepest rationale for the BRICS is almost certainly the creation of new
Bretton Woods-type institutions that are inclined toward the developing world,
Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory,
which provides research on emerging markets, said in a phone interview. There
s a shift in power from the traditional to the emerging world. There is a lot
of geo-political concern about this shift in the western world.
The BRICS nations, which have combined foreign-currency reserves of $4.4
trillion and account for 43 percent of the world s population, are seeking
greater sway in global finance to match their rising economic power. They have
called for an overhaul of management of the World Bank and IMF, which were
created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of
their respective presidents being drawn from the U.S. and Europe.
Reform Needed
We need to change the way business is conducted in the international financial
institutions, South African International Relations Minister Maite
Nkoana-Mashabane said in a March 15 speech in Johannesburg. They need to be
reformed.
The U.S. has failed to ratify a 2010 agreement to give more sway to emerging
markets at the IMF, while it secured Jim Yong Kim, an American, as head of the
World Bank last year over candidates from Nigeria and Colombia.
Finance ministers and central bank governors from the BRICS nations, who met in
Durban today, agreed to set up currency crisis fund of about $100 billion,
Brazilian Finance Minister Guido Mantega told reporters today. He didn t give
details of proposed funding for the new bank, which Brazil wants established by
2014. The nation s leaders are due to sign a final accord tomorrow.
FDI Inflows
Goldman Sachs Asset Management Chairman Jim O Neill coined the BRIC term in
2001 to describe the four emerging powers he estimated would equal the U.S. in
joint economic output by 2020. Brazil, Russia, India and China held their first
summit four years ago and invited South Africa to join their ranks in December
2010.
Trade within the group surged to $282 billion last year from $27 billion in
2002 and may reach $500 billion by 2015, according to data from Brazil s
government. Foreign direct invesment into BRICS nations reached $263 billion
last year, accounting for 20 percent of global FDI flows, up from 6 percent in
2000, the United Nations Conference on Trade and Development said on its
website yesterday.
If they announce a BRICS bank it will be quite something, O Neill said in an
e-mailed reply to questions on March 15. At a minimum it symbolizes they can
achieve something as political group and means lots of other things could
follow in the future. It also means that they will have their own kind of
special World Bank, which may aid infrastructure and trade projects.
Currency Pool
While BRICS leaders may approve the creation of a development bank in principle
at the summit, details on funding and operations may take longer to finalize.
Russia favors capping each side s initial contribution at $10 billion, Mikhail
Margelov, President Vladimir Putin s envoy to Africa he said in a March 15
interview in Moscow.
It will be some time before it will be feasible for this bank to start
financing say, a railway project, Simon Freemantle, an analyst at Standard
Bank Group Ltd., Africa s biggest lender, told reporters in Durban yesterday.
That is some way out.
Interest rates near zero in the U.S., Japan and Europe have fueled foreign
investors appetite for higher-yielding assets, driving up currencies from
Brazil to Turkey. Brazil has warned of a global currency war as nations take
reciprocal action to weaken their currencies and protect export industries.
African Leaders
Brazil s real has gained 1.9 percent against the dollar since the beginning of
the year, while South Africa s rand has dropped 8.7 percent in the period.
For South Africa, which makes up just 2.5 percent of total gross domestic
product in BRICS, the summit is a way to showcase its role as an investment
gateway to Africa. President Jacob Zuma has invited 15 African heads of state,
including Egypt s Mohamed Mursi and Ethiopia s Hailemariam Desalegn, for talks
with the BRICS leaders at the summit. For most of the BRICS leaders, it s also
the first opportunity to meet Chinese President Xi Jinping after his
appointment on March 17.
We will discuss ways to revive global growth and ensure macroeconomic
stability, as well as mechanisms and measures to promote investment in
infrastructure and sustainable development, Indian Prime Minister Manmohan
Singh said in a statement yesterday.
To contact the reporters on this story: Mike Cohen in Cape Town at
mcohen21@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net
To contact the editor responsible for this story: Nasreen Seria at
nseria@bloomberg.net