Brazil, Russia, India, China and South Africa — the Brics group of countries — agreed to establish a Brics development bank, as well as set up a contingent reserve arrangement to pool currency reserves to protect against volatility in global financial markets.
This was announced by President Jacob Zuma in Durban on Wednesday. The broad announcement to establish the bank was widely expected and may be seen as a political coup for the group. But it is clear that there are a range of issues to address before the bank can become operational, according to business leaders and political analysts.
The establishment of a contingent reserve arrangement is aimed at helping the Brics to head off short-term liquidity pressures, provide mutual support and further strengthen financial stability Zuma said.
The contingency reserve, which will amount to an initial $100-billion, and is subject to countries' internal legal frameworks and safeguards, is a distinct solidifying of intra-Brics financial ties, which will enable these major emerging economies to reduce reliance on international financial institutions such as the International Monetary Fund (IMF).
The bank and the contingency reserve form part of the eThekwini declaration and action plan signed by the five leaders on Wednesday. Establishing the bank requires consensus on a number of more contentious issues, including the bank's name and location, legal and governance aspects, its membership — namely whether it should include other developing countries — and, very importantly, its shareholding structure and the level of contributions from member countries.
A differentiated weighting of votes
Independent political analyst Mzukisi Qobo said China wants a differentiated weighting of votes, given the size of its economy and the likelihood that it will be contributing more funds to the bank than the others. India, too, sees itself as a potential host to the bank, he said, given its own extensive infrastructure needs and a desire to keep the bank focused on Brics projects. A bank based and led by South Africa, could be viewed as too Afrocentric.
Sonwabo Mateyisi, head of finance for economic development at advisory firm Deloitte, said the issue of shareholding is critical to South Africa, given it has the smallest economy within the Brics group. "If the capitalisation of the bank requires too much [funding], then we might be negatively affected and may be reduced to having a smaller shareholding," Mateyisi said.
Should the bank have the same capital and governance structure as current international finance institutions such as the World Bank and IMF, this would do little to distinguish it from these entities, which the Brics have accused of failing to reform.
These institutions, despite their rhetoric, have failed to select leaders from outside the developed world and are still viewed as being dominated by Western countries such as the United States. The Brics leaders re-emphasised their call to reform these institutions on Wednesday, which have in the past been seen to use economic assistance to gain political leverage.
Given that China is now the world's second largest economy — and is fast catching up with the US — a Brics bank would give it some clout in international finance.
Mateyisi also expected that the bank would also impose conditions that were "more favourable to emerging markets".
Qobo, however, argued that the bank's shareholding would need to reflect the extent to which member countries have contributed equity, rather than a one-member, one-vote system. In the context of global international finance institutions the Brics, particularly the likes of China, would want a bank that reflects changes to geopolitical dominance.
The Brics leaders did not state how much the initial capital for the bank would be, but indicated it "should be substantial and sufficient for the bank to be effective in financing infrastructure". Bloomberg quoted Russian Finance Minister Anton Siluanov as saying there was an initial proposal to declare capital of $50-billion.
How the funds would get drawn down from each country remains to be seen, said Qobo, as the contribution of each state would vary greatly when compared to the comparative size of their economies. China's gross domestic product (GDP topped $7.3-trillion in 2011, whereas South Africa's was around $408-billion the same year, according the figures from the World Bank.
Issues that still need to be ironed out include whether other emerging nations could join the bank and the extent to which the bank will focus on projects mutually beneficial to the Brics nations. There is also the question of whether private sector projects as well as government initiatives will be financed.
The bank's focus and agenda must also be clearly defined as it would replicate the work of China's own banks that already invest heavily on the continent, such as the China Development Bank. Brazil also has its own Brazilian Development Bank.
Neren Rau, chief executive of the South African Chamber of Commerce and Industry, said there were clearly a number of policy issues to clarify before the bank was established, including its ownership structure, funding model and location.
"Politically this is not an easy decision to take," he said. There were many reasons why other countries would not want South Africa to host the bank, including its relative economic size and its recent inclusion in the Brics grouping.
Nevertheless, he argued, the bank should be hosted locally given the sophistication of South Africa's financial markets. It would also allow for greater emphasis on infrastructure development in emerging markets, particularly in Africa.
Differences and similarities
The Brics countries often operate as competitors in a number of arenas, which has resulted in scepticism about how effective this grouping can actually be as an economic bloc.
Unlike other international structures such as the G8, the Brics do not share similar ideological foundations based on liberal, Western capitalism. Instead their commonality comes from a "more tenuous" ethos of state-led capitalism, said Peter Draper, senior research fellow at the South African Institute of International Affairs. But the broad outlines for more structural co-operation are beginning to emerge, said Draper, particularly in the light of deepening financial ties, such as the contingency reserve.
On the bilateral level, Brazil and China signed a $30-billion currency swap deal at the summit on Tuesday to support trade between them. China is actively seeking to step up the global reach of its currency, the renminbi, and reducing the reliance of global trade on the US dollar. The announcement to establish the Brics contingency reserve is a further example of the deepening financial relationships within the group. "The geopolitical upshot of this is that these countries are reducing their reliance on institutions like the IMF," Draper pointed out. South Africa's Industrial Development Corporation (IDC) signed three memorandums of understanding with institutions from Brics countries — two with Russian institutions and one with the Brazilian Development Bank on Wednesday.
The IDC had agreed to establish and develop comprehensive, long-term co-operation on vehicles and components, including alternative-fuelled vehicles; aeronautics and components; energy generation, particularly the use of cleaner energy sources and co-generation; food processing and agri-industries; pharmaceuticals; and mineral resource beneficiation, IDC chief executive Geoffrey Qhena said in a statement.
South Africa's Small Enterprise Finance Agency, an IDC subsidiary, also signed memorandums of understanding with the State Corporation Bank for Development and Foreign Economic Affairs, a Russian state corporation and its subsidiary, the Russian Bank for Small and Medium Enterprises Support, to support co-operation on small and medium enterprise development.
Transnet, meanwhile, announced an agreement with the China Development Bank to diversify funding sources for its R300-billion capital investment programme. It said the co-operation agreement will extend to the financing of the construction and upgrade of railway, and port infrastructure, localisation of equipment manufacturing.
Durban's watershed moment
Rain bucketed down at the fifth annual Brics summit in Durban this week, but although the weather may have left the estimated 5 000 delegates from Brazil, Russia, India, China and South Africa rather drenched, it did little to dampen the enthusiasm of locals for the gathering.
The hospitality industry, in particular, has received a boost just ahead of the upcoming Easter weekend, which was already expected to attract local holiday-makers, according to Durban Country Club chief executive Gerhard Patzer, who until last week served as chairperson of the Federated Hospitality Association of South Africa's KwaZulu-Natal arm. "[The summit] exceeded expectation," said Patzer.
Over the past two nights, all the hotels on the Durban beachfront as well as hotels and bed-and-breakfasts in the surrounding areas were full, he said. They are packed not only with heads of state and their entourages, but also with the legions of support staff, security and government officials.
It is not clear how much money the summit actually generated, for the figures are not yet available, said Patzer, but he expected hotel occupancy rates for March to be at least 5% to 10% higher than the same month last year.
He said an added spin-off was the boost the talks on the sidelines of the conference were generating for the many restaurants and smaller venues around the city.
One-on-one discussions on the sidelines of the summit appear to have been far more productive than the points made from the podium, with at least one major finance house conducting meetings from its headquarters rather than the confines of Durban's international convention centre.
In discussions with Russian President Vladimir Putin, and President Jacob Zuma — flanked by the ministers of state security and international relations, Siyabonga Cwele and Maite Nkoana-Mashabane — fleshed out South Africa's hopes for the mooted Brics bank, as well as talks relating to nuclear energy.
While broad areas of agreement on key issues such as the setting up of the development bank have come out of the summit, many participants have seen it more as an opportunity to deepen relations or create new ones. The real work of cementing these ties into something tangible will continue for a long time.