Research and analysis

Brazil: BRICS summit

Published 24 July 2014

0.1 Detail

On 14-15 July Brazil hosted the sixth BRICS Summit in Fortaleza Fortaleza Declaration link.

The centrepiece of the Summit was the formal establishment of the New Development Bank (NDB) to lend initial capital of $10bn at commercial rates for infrastructure and sustainable development projects in the BRICS and other developing countries. Each of the BRICS will subscribe $10bn within 7 years giving it a total capital base of $50bn. Each will have an equal vote on policies and disbursements. The Bank’s total authorized capital will be $100bn.

The Bank will be headquartered in Shanghai. China secured its first notable international financial institution, boosting Shanghai’s major financial centre aspirations. India holds the first 5 year rotating Presidency. South Africa got the first regional centre. Russia and Brazil have the chairs the Board of Governors, and the Board of Directors respectively.

In parallel, agreement was reached on a Contingent Reserve Arrangement (CRA) of $100bn. It aims to ‘strengthen the global financial safety net’ by providing liquidity through currency swaps to ease short term balance of payments pressures, primarily within the BRICs. China has the largest vote providing $41bn, though Russia, India and Brazil together constitute a majority.

The Summit Declaration emphasized the lack of progress on IMF reform (blocked by the US Congress) and described the Bretton Woods order as showing “increasingly evident signs of losing legitimacy and effectiveness”.

President Zuma described the NDB and CRA as “an everlasting legacy that will change the face of global economics and the face of all the developing world for the better”. But the structures may take time to get going.

When they do, they are more likely to be complements rather than substitutes for the existing IFIs. The initial scale of the proposals is modest. The NDB starts one third the size of the Asian Development Bank. The CRA funds available are small relative to country foreign exchange reserves in all the BRICS (except South Africa) and 70% of funds are tied to compliance in an IMF finance program and its attendant conditionality.

Both structures can be scaled up, funds permitting. They add a first meaningful institutional complement to BRICS dialogue. Taken together with other elements of the Declaration, e.g. cooperation, between BRICS’ export credit agencies, between their national development banks, and on insurance/reinsurance, the NDB/CRA could pose a longer term challenge to the current international financial architecture.

0.2 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.