BRICS Approve Currency Fund as Bank Start-Up StallsFranz Wild, Arnaldo Galvao and Ilya Arkhipov
Leaders from Brazil, Russia, India, China and South Africa approved a $100 billion fund to combat currency crises, while failing to reach agreement on financing for a development bank.
China may provide the bulk of the funding for the foreign-currency pool, Russian Finance Minister Anton Siluanov said in an interview today in Durban, South Africa. Negotiators are considering proposals for China to contribute $41 billion, Brazil, Russia and India to provide $18 billion each and South Africa $5 billion, he said.
“The establishment of a self-managed contingent reserve arrangement would have a positive precautionary effect, help BRICS countries forestall short-term liquidity pressures, provide mutual support and further strengthen financial stability,” South African President Jacob Zuma said after leaders from the five nations met in Durban.
The BRICS countries, which have 43 percent of the world’s population and total foreign-currency reserves of $4.4 trillion, are seeking greater financial sway to match their rising economic power.
Emerging markets from Brazil to Turkey have been hit by currency swings as interest rates near zero in the U.S., Japan and Europe fueled foreign investors’ appetite for higher-yielding assets. Brazil’s real has gained 1.9 percent against the dollar this year, while South Africa’s rand has slumped 8.8 percent.
Officials didn’t provide details today on how the currency fund will operate. In October, Brazilian Finance Minister Guido Mantega said the pool will be modeled on the Chiang Mai Initiative, which gives Japan, China, South Korea and 10 southeast Asian nations access to $240 billion of emergency liquidity to shield the region from global financial shocks.
While leaders agreed that a development bank was “feasible and viable,” they failed to provide detail on how it would be funded. The BRICS nations have been studying the viability of the bank for a year. In the run-up to the summit, officials from Brazil and Russia indicated each country could contribute $10 billion.
“We have reached broad consensus,” said Chinese President Xi Jinping said at the summit closing. The agreement on the banks and currency reserve arrangement “will further unlock potential cooperation. BRICS cooperation will help stabilize global economic governance.”
India proposed the bank a year ago amid criticism from developing nations that the World Bank and International Monetary Fund aren’t doing enough to address underdevelopment and Western nations have too much say over their management.
Any new institution is unlikely to achieve much in the near term, said Andrew Kenningham, an economist at Capital Economics Ltd. in London.
“It will not be easy to reach agreement on the bank’s capital contributions and governance structure,” he said in e-mailed comments yesterday. “If and when it gets up and running, it may simply duplicate or substitute for funds led by the Chinese Development Bank.”
Goldman Sachs Asset Management Chairman Jim O’Neill coined the BRIC term in 2001 to describe the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Brazil, Russia, India and China held their first summit four years ago and invited South Africa to join their ranks in December 2010.
Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. Foreign direct investment into the nations reached $263 billion last year, accounting for 20 percent of global foreign direct investment flows, up from 6 percent in 2000, the United Nations Conference on Trade and Development said on its website March 25.
Views differed among BRICS representatives on the total capital for the development bank, with India favoring $50 billion, South African Finance Minister Pravin Gordhan told reporters in Durban. There also wasn’t agreement on voting rights and the share structure, he said.
“A bank like this isn’t established overnight,” Gordhan said. “The fact that in one year you can initiate an idea and get it to a point where you’ve got five different countries saying let’s establish it and having established its feasibility and viability is phenomenal progress which you rarely see around the world.”
Russia’s Deputy Foreign Minister Sergei Ryabkov was more circumspect about the bank, saying it will take some time before it’s created.
“We don’t have disagreements, we have different approaches,” he told reporters in Durban. “It is early to take a formal decision to create the bank now. The devil is always in the detail.”