by Tracee Harvard

Banking on BRICS

A Good Question

The power behind the proposed South-South BRICS Bank, could mean great things for emerging markets
Early next year, South Africa will play host to the launch of a joint development bank planned by the BRICS group of major emerging economies (Brazil, Russia, India, China, South Africa), Foreign Minister Maite Nkoana-Mashabane revealed following some questions whether the idea would indeed materialise. 

Optimists do well to point out that for critics, the leadership vacuum within BRICS has been a suggested barrier to success, as opposed to economic capacity. The financial clout is largely undisputed, pointing to strong potential for the multilateral leadership that has emerged with a decisive announcement by South Africa. 

Toward the end of March, Indian Prime Minister Manmohan Singh issued a statement hot on the heels of the fourth BRICS summit in New Delhi on 29 March, saying the leadership of the five countries had considered a proposal to set up a BRICS-led South-South Development Bank.

Implicit in the statement was the notion that the fund could rival the World Bank – a sentiment embraced by those who believe the institution is structurally suited to an era in which the West’s economic prosperity and prominence was not as precarious as it is today, relative to global trends and the rise of China. 

This is alongside an annoyance that Africa and other emerging economies still suffered when downturns in Western markets directly impacted dollar-denominated investments. The key issue for analysts and business alike concerns how exactly the BRICS bank and future financial arrangements will change the nature of global trade south to south and, indeed, globally. 

Intra-BRICS trade stands at about US$230-billion (an estimated R1.78-trillion), with members holding it has the potential of surging to $500-billion (R3.87-trillion) by 2015. Its bank loans and trade will occur in the currencies of BRICS members, not the dollar. 

“The idea is in line with many interests and economic exigencies in the world economy,” Yaroslav Lissovolik, the chief economist at Deutsche Bank, told Russia’s RT newspaper, and quoted by Casey Research – a firm that has long warned of the vulnerabilities of the US dollar. 

“The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies,” Lissovolik added. “Clearly, the world needs more reserve currencies.”

As it stands now, the South African government says a Master Agreement In Extending Credit Facility in local currencies, and the BRICS Multilateral Letter of Credit Confirmation Facility Agreement have been signed by the Brazilian Development Bank, Russia’s state corporation Bank for Development and Foreign Economic Affairs, India’s Exim Bank, the China Development Bank Corporation and the Development Bank of Southern Africa. 

The response internationally saw the Associated Press pointing out that developing nations again seem unlikely to propel one of their own citizens to the World Bank presidency. However, “it may not matter” in light of the proposed BRICS bank. 

The implications for business and investment would mean the country would possibly be shielded from the volatility of the dollar if it conducted trade and investment in any choice of currency within the BRICS formation. 

In an era in which the United States dollar is the world’s reserve currency, following the elimination of the gold standard in 1930s, the BRICS bloc seems keen to remove its economics from the impact of economic woes in the West. As a result, agreement is likely for trade to take place in local currency as opposed to the US dollar. 

The outcome, many believe, will insulate the currencies from fluctuations in the West or established economies currently not experiencing anything remotely related to the growth rate of several emerging economies. As pointed out by RT, trading in their own currencies would “also increase the BRICS influence on the international arena and will make their co-operation less sensitive to sanctions from the West, experts say.” 

It is believed trade will be boosted, particularly as the governments of the BRICS have set a target of $500-billion (R3.87-trillion) in trade by 2015. 

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