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."