BRICS bank: all eyes turn to Durban

14 March 2013

The world will be watching closely to see whether the leaders of Brazil, Russia, India, China and South Africa can conclude negotiations for setting up a BRICS development bank when they meet in Durban in less than two weeks’ time.

The 5th BRICS summit will take place in Durban on 26 and 27 March.

Emerging markets analysts believe a BRICS development bank – first mooted at last year’s BRICS summit in Delhi, India – could help create jobs in South Africa and promote greater trade on the African continent by funding new infrastructure.

Last week, International Relations Minister Maite Nkoana-Mashabane told City Press newspaper that South Africa was keen to host the development bank, saying the country had a history of sound financial expertise and that the African continent was home to seven of the 10 fastest growing economies.

Trade and Industry Minister Rob Davies said this week that South Africa had a strategic interest in extending BRICS cooperation to support Africa’s development agenda. He added that he believed Africa’s relationship with BRICS had influenced growth on the continent.

Finance ministers working on business plan

The finance ministries from the five member countries have been working on a business plan for the development bank, and met on the sidelines of the G20 conference in Moscow last month to explore the bank’s potential structure.

World Bank chief economist Kaushik Basu has backed the idea for a BRICS development bank, but warned that it would be a “humongous task” to set up.

While Martyn Davies, the chief executive of Frontier Advisory, said in January that there had been discussion of a fund of up to US$240-billion, Standard Bank expects each of the five member states to initially contribute $10-billion in seed capital for the bank, with further funds raised from the markets as necessary.

However, Standard Bank research analysts Jeremy Stevens and Simon Freemantle cautioned that China’s eventual contributions might outpace that of the other BRICS members and that, if this happened, Beijing would understandably demand commensurate influence over the fund’s decision-making mechanisms.

Challenge posed by Chinese dominance

In a research note last month, Stevens and Freemantle pointed out that while for China $10-billion amounts to just 0.12% of gross domestic product (GDP) (as per 2012), the same contribution would constitute a far more hefty 2.5% of South Africa’s total economic output.

Added to this, China dominates BRICS trade and is the number one import partner for all four of its BRICS partners; its economy at the end of 2012 was almost 25% larger than the other four BRICS nations combined.

“Unless pragmatically managed, political strains similar to those faced within the IMF may emerge. An appreciation of this potential challenge should thus frame deliberations in Durban,” said Stevens and Freemantle.

They expect the development bank to focus on infrastructure development and providing auxiliary support for project preparation, such as feasibility studies. They said they expected a working group to be later tasked with establishing the necessary technical commitments and governance structures.

The two believe that the development bank would not be a counterweight to multilateral development banks – notably the World Bank – but rather act an auxiliary funding institution.

Benefits for South Africa

In a parliamentary reply this week in response to a question from an opposition MP on what the impact had been of South Africa’s membership of BRICS, Economic Development Minister Ebrahim Patel said the country had enjoyed several benefits.

Patel said South Africa had grown its level of trade with the BRICS countries, had seen significant growth in tourism from other BRICS countries, was now a stronger destination for potential investment, and was able to influence the development of greater BRICS partnerships with the rest of the African continent.

On trade, the four other BRICS countries now account for a larger share of South Africa’s imports and exports. Measured in US dollars, exports from South Africa to its BRICS peers rose from $12.1-billion in 2010 to $15-billion in 2012, Patel said

“This helped to compensate for reduced demand from traditional markets which are experiencing slower or negative growth.”