BRICS development bank takes shape

The BRICS development bank is starting to take shape. Brazil, Russia, India, China and South Africa will each make an initial capital injection of $10 billion to fund the bank, which means the bank will start out with US$ 50 billion in capital. The idea is to establish a joint bank to provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries.

The development bank will lend to private and public companies in order to make sure more people will benefit from the bank’s capital. Governments outside the BRICS group can also be favored if they propose social or green projects (biofuel, for instance). Even nuclear power plants might receive money, a kind of project the World Bank does not fund due to social and environmental issues. Currently, 50 of the 66 nuclear reactors under construction are in the BRICS countries.

The new development bank wants to be an alternate lender to the World Bank and other finance bodies. The five nations have been struggling to change their role in the World Bank and in the International Monetary Fund (IMF). The BRICS countries have been important borrowers from the World Bank and they also have been increasing their contribution to IMF. The five nations want the IMF to reform its quota system to enhance their representation. The current voting policy in IMF does not reflect, for instance, the enormous changes in the global economy over the past few decades. The new development bank, therefore, might provide a bargaining power.

After a disappointing performance last year, the BRICS countries can make investors happy again in 2013. Last week, David Hauner, head of fixed-income strategy for emerging Europe, the Middle East and Africa in Bank of America Merrill Lynch, said investors should buy the BRICS bonds and equities this year. “What we’re saying about emerging markets is that the BRICs are back,” said in an interview in Abu Dhabi. “Last year a lot of people were saying that the BRICs are finished and of course we had disappointing growth in all of them. Now this year we see a recovery.”

According to Hauner, emerging markets are expected to record economic growth of 5.2% this year compared to 4.9% in 2012. The BRICS countries might be on the spotlight and, again, China might present the best growth rate. “Our own global asset allocation suggests that you should be overweight equities, overweight emerging market bonds, should be overweight high yield.”

Globally, however, the International Monetary Fund (IMF) continues to expect a modest economic growth of 3.5% in 2013. Within the BRICS countries, Brazil growth might disappoint again. The largest economy in Latin America might grow 3.5%, a better rate just comparing to South Africa (2.8%). China growth rate might reach 8.2%, followed by India (5.9%) and Russia (3.7%).


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