Brics bank a costly club to belong to
25 July 2014
by eNCA
SA pulled off a diplomatic coup when it was invited to join the Bric grouping in 2010 since it in no way deserved to be in a club with some of the fastest-growing emerging markets in the world, given its economic performance, either then or now.
SA expected to benefit from deepening trade and investment relations with the four dynamic Bric nations (Brazil, Russia, India and China), enabling it to diversify its trading partners away from stuttering industrialised economies.
This has happened to some extent, but it is only with the announcement in Brazil last week that the Brics will be launching its own US50-billion development bank and $100-billion credit line facility that SA can lay claim to tangible results.
The Brics’ New Development Bank (NDB) is either going to be the best thing that ever happened to SA, accelerating infrastructure development at home and in the region to the benefit of private SA companies, or it is going to be a R100-bn drain on the country’s foreign reserves that might even weaken SA’s credit rating.
Sachs in sub-Saharan Africa, thinks that SA, as the smallest Brics economy, stands to gain the highest return since it is “highly likely” that a significant portion of the infrastructure projects funded by the bank will be in Africa.
This is so not only because Africa is relatively undeveloped but also because the development of African economies is strategically important to the Brics members, especially as a source of raw materials.
“If this bank has the institutional capacity to get things done it is a very different proposition from the Development Bank of Southern Africa or the African Development Bank (AfDB) financing locally arranged projects,” says Coleman. “It implies the strategic co-operation and mobilisation of capacity from stateowned enterprises and the financial and corporate sectors in the Brics countries. This could have a very significant impact on African development.”
Africa has infrastructure investment needs of about $100bn/year, half of which are unfunded. This unfunded gap is constraining Africa’s GDP growth by as much as 2% in some countries, according to AfDB chief economist and vice-president Mthuli Ncube (see page 42). He is “strongly in favour” of the NDB, which he sees as a development partner that could help the AfDB to close this gap.
At the opposite extreme is Pan-African Capital Holdings CE Iraj Abedian, who considers the NDB “a Mickey Mouse political gesture” with no prospect of making any real impact on the sliding growth of Brics countries. It will take three to five years just to get the bank operational and its size, at 100bn, is insignificant in relation to the GDP of Brics countries, he avers.
The Brics have not tried to downplay the fact that the creation of the NDB is a political gesture designed to send a message to the West that the balance of economic power has shifted and the developing world will no longer be denied a seat at the top table.
The NDB will provide developing countries with an alternative source of capital to the International Monetary Fund and the World Bank, dominated as they are by the US, which has failed since 2010 to ratify reforms that would give greater voice to developing nations in these institutions.
The expectation is that NDB financing will come with fewer conditions attached than IMF or World Bank funding, whose structural adjustment requirements have long been a source of tension with the developing world.
But Tutwa Consulting director Peter Draper doesn’t buy this argument. “It may be the case that the conditions under which funds will be lent may initially be more lenient than those of the World Bank, but I suspect that once the rubber hits the road and these countries’ tax money is on the line, their finance ministers will respond accordingly by tightening conditions,” he says.
SA lost out to Shanghai in its bid to have the bank headquartered in Johannesburg, but perhaps this is not such a bad thing. “Financially and managerially, the Chinese are the most capable of running a Brics-focused bank that funds large infrastructure projects,” says Frontier Advisory CEO Martyn Davies “Nobody does developmental finance as well as the Chinese.”
But for SA to get the most out of the bank he feels there are two things that must change.
The first is to ensure that not only SA parastatals but also SA’s private construction and engineering firms benefit from NDB projects in Africa, as opposed to Chinese, Indian or Brazilian ones. He points out that SA is the only Brics country that doesn’t align its development finance to benefit its private sector. “I can’t imagine China’s Development Bank or BNDES [Brazil’s development bank] financing projects abroad using taxpayers’ money and not using the projects to benefit their private companies,” he says. “In SA there’s a disconnect, a low-trust political economy, an unwillingness to act as Team SA.”
Second, he argues that SA needs to move away from the altruistic idea that the Brics bank should be used to develop infrastructure in other African countries rather than directly in SA, when it is SA taxpayers’ money that is being put on the line.
While funding infrastructure in SA’s close neighbours might have direct spinoffs for SA, doing so in far-flung countries would have a minimal benefit, he says.
The big worry for Abedian is that “SA is way too poor to be a bank partner”.
The NDB will have subscribed capital of 50bn. Each of the five Brics member countries will have an equal shareholding to match their individual contributions of 10bn (roughly R100bn each). The World Bank had capital in June last year of $223bn.
In addition, the Brics have established a 100bn Contingent Reserve Arrangement (CRA), to act as a financial safety net to address short-term balance of payments or liquidity crises that member countries may face.
The CRA is a virtual pool of members’ foreign reserves to be called on only in time of need. China will make available $41-billion, Brazil, Russia and India $18-billion each and SA $5-billion. The agreement allows China to seek assistance up to a maximum of $20-billion; Brazil, Russia and India up to $18-billion each; and SA up to $10-billion.
The CRA complements a similar facility operated by the IMF but which, at $850-billion, is over eight times larger.
Abedian fears that setting aside R100-billion or roughly 20% of SA’s foreign exchange reserves to capitalise the NDB, not to mention the contingent liabilities that SA would assume as a bank shareholder, could put SA’s credit rating at risk.
However, Standard & Poor’s (S&P) MD for sub-Saharan African and SA, Konrad Reuss, says SA’s participation in the NDB will initially have no direct rating implications since it will take time for the bank to build up its loan book and for rating agencies to work out the contingent liability it presents to its shareholders.
On the other hand, he confirms that S&P looks at unencumbered foreign exchange reserves when measuring a country’s external liquidity, so it would be forced to net out any illiquid or fully committed reserves from any future analysis of SA’s position.
“[The level of SA’s reserves] is not one of SA’s strong points, so committing a certain portion of SA’s reserves wouldn’t strengthen SA’s external liquidity ratios, but a lot remains to be seen in the detail,” he says. “For now we wouldn’t see a direct ratings implication.”
Some economists have argued that by giving SA access to a $10bn credit facility to stabilise its currency during a crisis, the CRA could place a valuable floor under the rand.
While such a facility is “a nice-to-have”, Reuss doesn’t believe it would be “a gamechanger” from a ratings perspective since SA’s problem has never been lack of access to capital markets.
“In the event of a crisis, the facility would provide a short-term way of patching things up but it would be no substitute for real political action to address underlying problems,” he says.
For Sanlam economist Jac Laubscher, SA’s capital contribution to the new bank will be worthwhile if it gives SA access to substantial amounts of preferential funding at lower interest rates or with fewer conditions than it has now.
For example, if the bank was prepared to invest in Eskom, it would give SA a much bigger asset base from which to capitalise the embattled parastatal.
But the most important thing will be whether the five Brics countries can work together. The NDB is likely to be pulled in a number of different geographic directions and be in constant danger of becoming hamstrung by politics and bureaucracy.
It isn’t going to be easy to translate geopolitical will into effective delivery. Even more so for a group of countries that have little more in common than their desire to thumb their noses at the West.
eNCA