25 February 2013

Standard Bank Group cautiously optimistic about BRICS development bank

The feasibility of establishing a BRICS development bank will be an agenda item prominent in the upcoming fifth BRICS summit. The envisioned bank is expected to focus on financing infrastructure development projects and providing auxiliary support for project preparation such as feasibility studies, according to a report released by Standard Bank Group today.

Standard Bank Group sees the proposed BRICS bank as an attempt to give an institutional underpinning to the BRICS grouping, with the main ambition of directing development in a manner that reflects the BRICS priorities and competencies. Standard Bank Group believes that the proposed institution would contribute constructively to the development of more robust and inter-dependant ties between the BRICS.

Standard Bank Group expects the BRICS to establish a working group at the summit to give effect to the notion of a BRICS bank, and expects the summit to yield a relatively concrete outcome pertaining to the objective, structure and governance of the bank, which would ultimately allow for its formal establishment.

"The proposed BRICS bank is expected to operate as a conduit for funding economic development, much like the World Bank. We believe the bank will focus on financing projects linked to intra-BRICS bilateral multipliers and shared interests such as job creation and urbanisation, with a particular emphasis on physical infrastructure projects," says Jeremy Stevens, Standard Bank Group's Beijing-based economist, who is also one of the authors of the report. "However, the BRICS bank is not a counterweight to multilateral development banks, notably the World Bank, but is an auxiliary funding institution, albeit more aligned to BRICS development agenda."

He adds that the success of a BRICS bank will depend on its specialisation, rather than creating overlapping agendas with other development financing institutions and BRICS' state policy banks, including Brazil Development Bank, China Development Bank and Export-Import Bank of India.

"A host of pragmatic issues require resolution, including the funding source, ideal borrower (whether it will be sovereigns or includes the private sector), types of projects, geographical reach, bank headquarters and many others," Mr Stevens notes.

It has been proposed that each of the five member states would initially contribute USD10 billion in seed capital to the BRICS bank. And the bank would then aim to borrow from global capital markets by issuing bonds, thus becoming a non-resident borrower in the US, Europe, Hong Kong and elsewhere.

"The egalitarian principle behind the proposal for the seed capital is commendable and based, presumably, on a desire to avoid discrepant influence and political tension created by varying contributions, but it is inevitable that the contribution will pressure some members more than others. It seems as though the eventual contribution to the bank, and the distribution of the associated risk, may vary and influence over the fund's decision-making process may too. Unless pragmatically managed, political strains similar to those faced within the IMF may emerge," Stevens says.

"For a BRICS bank, a critical divergence with the World Bank will likely emerge in the cost of funding. World Bank bonds are AAA-rated, given the fact that they are guaranteed by the institution's 180 member states. With a much smaller pool of economies acting as guarantors, the BRICS bank is likely to have less favourable cost of funding than the World Bank as well as individual BRICS state policy banks."

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