The BRICS nations and their symbol of Independence

The BRICS nations and their symbol of Independence

The 9th BRICS summit is upon us, being held in Xiamen, this month from the 3rd to the 5th of September, under China’s Chairmanship. Despite the political and economic turmoil that underpins the BRICS states, one may conclude that these countries are just ‘too big to fail’. We consider the establishment of a Contingent Reserve Agreement (CRA), which may represent a possible mechanism to keep these countries’ economies from plummeting.

Dependence on the US dollar arises because its share within global combined reserves remains roughly above 60{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}, with 85{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of global transactions dollar-denominated. Traditionally, central banks in need of dollars would approach the Federal Reserve. There was no issue with the Fed providing dollar swaps, especially during the global financial crisis, but there is no guarantee that this will be the case for future swaps. Therefore, new monetary patterns have evolved where several countries, as an alternative to signing up for IMF credit lines, would engage in swap lines. Hence the need for the BRICS symbolizing their independence and creating a pool that member states can draw from.

The CRA was introduced during the 5th and 6th BRICS Summit (2013-2014) with the establishment of the New Development Bank (NDB). Its main intention is to lessen BRICS countries’ dependence on the US dollar and the US Federal Reserve System. According to Article 1 of the treaty that sets up the BRICS CRA, its objective is to offer a “framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures”. The BRICS nations committed a total of $100 billion of their foreign exchange reserves to the CRA. China, with the largest reserves, committed $41 billion, Russia, Brazil and India $18 billion each and South Africa $5 billion. These are available as swap lines, that members can draw on if they experience balance of payments difficulties, as foreign reserves become necessary to remedy a run on the currency. Each country retains possession of its committed resources until a country is granted support, upon requesting for assistance. Article 5 of the treaty specifies the maximum withdrawal limits, indicating that China can draw up to half of its commitment, Brazil, Russia and India their full commitments and South Africa can access twice its commitment, of $10 billion.

In its current state, the CRA is said to act as ‘symbolic and exploratory’ rather than something that challenges the International Monetary Fund (IMF). However there has been a dissatisfaction from the fact that the BRICS possess only 11{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the votes in the IMF, while they account for over 20{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of global economic activity. This is indicative of the criticism by developing states towards the Bretton Woods Institutions for being favourable towards western economies. By setting up the CRA the BRICS leaders have started a symbolic process to advance and strengthen their own institutions to counteract certain western biases. It is no surprise that the 9th Summit theme revolves around “Stronger Partnership for a Brighter Future”.

It is evident, however, that turmoil exists in and among the BRICS nations. Certain instances relate to geopolitical tensions between the BRICS nations themselves, such as India’s boycotting of the One Belt, One Road Summit, hopefully to be resolved in the upcoming summit. For South Africa, it is apparent that internal political and economic complications are stewing from a sovereign debt-crisis perspective. The commercial banks remain heavily exposed to state-owned enterprises’ (SOE) debts and the government has become the acting ‘defibrillator’. The news that CITI Bank would not extend South African Airways’ (SAA) debt comes as no surprise, it being the second bank after Standard Charted Bank in June, to refuse to rollover a bankrupt SOE’s debt obligation. SAA’s debt comes due this September and currently sits at R6.8 billion, which would render an additional R7.8 billion payable by the South African government, weakening its fiscal position further. The question remains as to whether banks will unite in declining to roll-over existing SOE debt or will protect themselves from the debt exposure, relying on government to bail out the SOE and settle public debt. The government’s total exposure to SOE’s debt is currently at R19 billion.

Is it then likely for a debt crisis to trigger a rescue from the IMF or a draw down from the specified CRA? Precursors to balance of payments difficulties are usually aligned with a growing current account deficit. According to the IMF’s Article IV assessments, South Africa shows a lessening of the current account deficit but they note that the public sector’s balance sheet remains critically exposed to liabilities from SOEs.

The intention of previous CRAs such as the East Asian Chiang Mai Initiative Multilateralization (CMIM), which reportedly constitutes about $240 billion compared to the IMF’s $720 billion, was the same. However, it has not been used even in the wake of the global financial crisis. This was largely due to the conflicting interests between borrowers and lenders. For instance, countries like South Korea, Indonesia and Singapore experienced major balance of payments issues, in 2008, but resolved to use currency swaps rather than draw-down from the CMIM. This is because the set-up of the Initiative is IMF-linked, where draw-downs exceeding a specified amount require countries to negotiate a programme with the IMF. During the crisis years, these countries required larger reserves, such as South Korea needing $30 billion. It resolved to use a currency swap with the US, as its CMIM portion that was not linked to IMF conditions was only $3.7 billion, which was in any case insufficient. Taking on the $30 billion from the CMIM is said to have been ‘political suicide’ from their perspective.

In the case of BRICS, these large diverse countries have differing interests. Any country in need of balance of payments assistance could require a draw-down from the CRA. If the amounts are significant, certain members may be hesitant and want to impose conditionalities and a monitoring mechanism, especially if there are doubts about repayment. This raises questions on whether certain countries would be willing to use the CRA.

Imposing monitoring conditions may solve the problem of a lack of repayment but it would seem impossible that BRICS nations would want to receive policy conditions from each other. Ironically, within the CRA, the IMF steps in again as a monitor in the treaty. Essentially, when countries draw more than 30{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of their swaps, they need to negotiate a program with the IMF, defeating the purpose of independence. This questions the relevance of the BRICS CRA. It is also important to note that substantial funding may be necessary to support balance of payments issues. For instance, South Africa’s non-IMF-linked portion of $3 billion, is smaller than its public debt commitments; one wonders how effective the CRA would be if South Africa were to request assistance. One can take the view that countries would rather choose independence over drawing large amounts that would involve taking on conditionalities from the IMF and oversight from member countries.

Photo credit: GovernmentZA via VisualHunt.com / CC BY-ND

SA needs a concrete BRICS strategy

SA needs a concrete BRICS strategy

Heads of state of the BRICS countries are gathered in Ufa, Russia, this week for the grouping’s seventh summit, which comes at a particularly challenging time for Russian diplomacy. Precipitated by the conflict in Ukraine, Russia is barred from the Group of Seven/Group of Eight processes and increasingly estranged from the West.

It intends to use the BRICS summit to project itself as a major global power.

By holding the summit at the same time as the annual meeting of the Shanghai Co-operation Organisation (SCO), Russia is attempting to impress its Central Asian neighbours and highlight its growing strategic co-operation with China, co-organiser of the SCO. This also sends a message to the West that Russia has other platforms on which to challenge for global power. Russia’s agenda preferences can be conceived along two axes: global security and politics; and economics.

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“BRICS heads of state and government hold hands ahead of the 2014 G-20 summit in Brisbane, Australia (Agencia Brasil)” by Roberto Stuckert Filho

BRICS national security advisers are meeting regularly, discussing a range of international issues such as the rapidly evolving situation in the Middle East, to the extent that the BRICS can agree on co-ordinated positions on such difficult issues. This will presumably build the group’s coherence over time.

Offsetting this potential is their disagreement on how to reform the United Nations Security Council — a key gap since it is at the apex of the global security architecture. Accordingly, Russia emphasises economic co-operation.

Discussions at the Ufa summit are broadly divided into two parts: the financial co-operation package and the evolving Strategy for BRICS Economic Partnership.

The strategy is too general and vague and unlikely to grow in substance at Ufa. Perhaps, for this reason, the Russians are pushing for a move beyond a strategy “on paper”, to identify concrete trade and investment projects up to 2020.

Nonetheless, three top priorities appear to have been identified in the BRICS economic strategy discussions.

First is co-ordination on e-commerce, and Russia proposed the establishment of a working group. This was apparently downgraded to a limited agreement to convene a dialogue leading, possibly, to the establishment of a working group.

More cynical observers of the BRICS believe Russia wants to use this discussion to market a cellphone operating system they have developed.

Second are ongoing discussions about trade facilitation. These centre on the creation of a virtual working group on trade and export promotion agencies. There have also been discussions about establishing a single window for electronic processes connected to trade.

Third, China has proposed closer collaboration on intellectual property rights regimes. Observers are understandably sceptical of the prospects and co-ordination possibilities, since the focal points in each country are not obvious. But agreement has ostensibly been reached to exchange information on member states’ systems.

At Ufa, there will be much discussion of the two signature BRICS achievements to date: the Contingency Reserve Arrangement and the New Development Bank.

Given the closed nature of BRICS processes, it is difficult to discern SA’s positions on the grouping’s economic agenda but some contours are apparent.

SA seems to regard the economic partnership strategy as being weak and less of a roadmap of how to get things done than a “ticking the check box” exercise for Russia to notch up some “success”.

For SA it is not clear how the strategy will promote more value-added exports and attract investment in minerals beneficiation or processing at source. The draft trade ministers’ joint communiqué is seemingly noncommittal and soft.

SA has some challenges with agreeing to create a single window for trade facilitation. It has to navigate through legal arrangements within the Southern African Customs Union, especially on external agreements SA has with third parties that may see the free movement of goods in the common customs area.

Although the government supports India’s proposed business travel card, modelled on the Schengen visa arrangement, SA views it as unfair that its liberalised visa arrangement for the BRICS countries has not yet been reciprocated.

Several working groups have been set up under the auspices of the BRICS Business Council: for manufacturing, ICT, small business and finance. The president of the South African delegation to the council, Brian Molefe, proposed new working groups for deregulation and agribusiness.

South African business is interested in common issues affecting BRICS trade and investment and specific issues pertaining to particular companies and industries — such as pharmaceuticals — for which they want to identify important platforms for joint technology development.

They support the trade facilitation agenda in principle, but want progress in promoting transparency in the financial incentives each country makes available to its companies, and progress in approvals for businesses from other BRICS countries.

They want to promote “fair” trade. The concern is that SA has the lowest average import tariffs of all BRICS countries, but implements the fewest nontariff barriers.

South African business representatives to the BRICS Business Council are concerned about how the government is managing the BRICS process.

It is regarded as too bureaucratic and there is a strong feeling that the government is not prepared to tackle the real issues, such as “fair” trade.

There are problems within the council. Brazil has not been driving the process, and Russia and China are represented primarily by state-owned enterprises — unlike India, Brazil and SA — with the interests of the private and state sectors not being sufficiently aligned.

The BRICS process seems to be of limited use to South African business.

Promoters of the Contingency Reserve Arrangement argue that it will provide “insurance” to SA in the event of investment status downgrades by the ratings agencies, and an ensuing capital flight — an increasingly likely proposition. SA could tap these resources during balance of payments crises, enabling the government to cover calls on forex reserves.

However, the Contingency Reserve Arrangement is not capable of providing more than an initial first line of support. The amount SA could call from it is capped at $10bn — twice its contribution of $5bn — a small fraction of the daily turnover in South African currency markets. But only $3bn can be called without recourse to the IMF.

Clearly, a lot more money would be required to prevent a run on the rand, assuming the South African Reserve Bank wishes to intervene to prevent a slide in the currency, which it does not. In the extremely unlikely event that such funding was to be sought, it would come from the International Monetary Fund (IMF). The Contingency Reserve Arrangement rules explicitly provide for this. The idea put forward by some BRICS promoters, that the Contingency Reserve Arrangement will enable the BRICS countries to avoid IMF conditionalities, therefore holds no water.

South African officials have indicated they will seek to revive African infrastructure development as an important issue for the Ufa communiqué. They are of the view that this lost momentum during the 2014 BRICS summit. There is much speculation about the New Development Bank’s Africa Regional Centre, whose agreed establishment is regarded as a diplomatic victory for SA.

The government is still working on the Africa Regional Centre’s articles of association. There seems to be agreement it will be located in Johannesburg. It could, in effect, be a “mini New Development Bank”, targeted at African markets, but it is not clear how it will relate to the New Development Bank’s head office in Shanghai, and what autonomy it will enjoy.

The BRICS Business Council has expressed an interest in playing an advisory role in the New Development Bank, as it wants more say in project selection and the disbursement of funds. But there is no clarity on the interest rates that will be charged; how small and medium enterprises will be treated; the methodology to be applied in selecting projects; and how considerations such as sustainability will be integrated into project design and selection.

Further complicating matters, the government recently decided to join the Asia Infrastructure Investment Bank, which will be heavily focused on infrastructure projects in Asia. It is not clear what the strategic value of this move is — apart from earning kudos from China. But it could erode the effectiveness of the New Development Bank and the Africa Regional Centre.

The BRICS agenda for Ufa is ambitious. It is important SA identifies its clear interests and thinks carefully about its allocation of resources vis-à-vis potential returns.

This article was co-authored by Peter Draper and Mzukisi Qobo, and was published 6 July 2015 on Business Day Live.