The Brics New Development Bank, a new institution of the trade alliance, will have to re-examine its role, model and activities after struggling to expand as rapidly as envisioned, battling to secure more diversified funding and failing to effectively challenge Western-dominated multilateral development finance institutions as hoped.
Former Brazilian President Dilma Rousseff was appointed as president of the bank in March this year, to provide fresh leadership to the organisation. Strengthening the capacity of the NDB, and refining its role and structure was top of the agenda of the past Brics summit.
Rousseff has stated the ambition to forge a development bank for developing countries. What she calls “a bank made by developing countries for themselves”. The bank’s aim is to lend without attaching political conditions, such as good governance, structural adjustment, or using the staff or businesses of the lender, as part of its loans, to distinguish itself from the World Bank, IMF and Western lenders.
The Shanghai-based NDB was established in 2015 by Brics nations, Brazil, Russia, India, China and South Africa, to challenge the existing Western-dominated global financial institutions such as the World Bank, International Monetary Fund, to provide lending to developing countries. It was established with $10bn (R186.6bn) in paid-in share capital from each member. The Brics have tried to set up alternatives to Western-dominated global financial, trade and political institutions.
So far, the NDB has lent $33bn (R615.8bn) to infrastructure and development projects. The NDB has struggled to expand to large numbers of emerging markets — from its core five founding members. The bank has expressed its priority to expand its geographic representation.
The bank has been hoping to raise capital from new members. The bank now has eight member countries. The bank only loans to member countries. At its launch it was envisaged the bank would lend to members and non-members. The only new members outside the Brics are Egypt, United Arab Emirates and Bangladesh since 2021. Uruguay is in the process of being admitted. The bank is considering applications from 15 other countries. However, the bank compares poorly to other development banks. The Asian Infrastructure Investment Bank, launched in 2016, has 106 members, including 45 members outside Asia and 23 European countries.
Nevertheless, new members may not be happy to take a backseat in decision-making and management – and the bank may have to relook at its governance statutes to give new members an equitable say.
The NDB’s shareholder governance structures provide that the five founding members retain the majority voting power and the senior board and executive positions. The bank tries to make decisions based on consensus. Nevertheless, new members may not be happy to take a back seat in decision-making and management — and the bank may have to relook at its governance statutes to give new members an equitable say.
Western sanctions against member Russia because of its war on Ukraine have also undermined the NDB’s operations, its ability to expand more rapidly and to secure more diversified funding. The bank suspended all its activities in Russia, fearing Western sanctions. Russia holds 19.4% of the bank’s capital. Fitch, the ratings agency, downgraded the bank’s debt from AA+ to AA last year, because of Russia’s holdings in the bank. Fitch said the bank “could face challenges to issue a long-term bond on US capital markets”. Fitch in May this year changed the bank’s outlook to stable after the bank’s successful issuing of a $1.2bn (R22.4bn) green bond.
The impact of the Russia-Ukraine war on the Brics development bank is forcing a rethink of the role of the bank. Brics countries now want the bank to play a central role in de-dollarising the global markets, but the bank heavily depends on US capital markets. The majority of the bank’s capital, about 70%, is in US dollars. Sanctions against Russia have increased the bank’s borrowing costs — particularly US dollar-based transactions.
As a case in point, a five-year $1.5bn (R28bn) bond issued by the bank in 2021 had a 1.125% coupon; but two years later a similar five-year bond had a 5.125% coupon, making the bank more expensive than other development banks. Because of the increase in the costs of the bank’s lending, it reduces its new lending. The bank only lent $1bn loans in 2022. The bank’s CFO Leslie Maasdorp told Reuters that because “of the capital market challenges of 2022, and in an endeavour to preserve the bank’s core financial ratios, there was indeed a slowdown”.
The bank is keen to get new members to increase its capital base and wants to increase fundraising in member currencies, to reduce its reliance on the US dollar.
Russia has proposed the NDB should become a clearing centre for a Brics common currency.
“We are ready to discuss the New Development Bank becoming a kind of clearing centre,” according to Russia’s finance minister Anton Siluanov.
Brics economies seek to reduce the use of the US dollar in trade. As part of its strategy to de-dollarise, the bank will this year lend in South African, Brazilian and Indian currencies — either through currency swaps or debt issuing.
Brazil’s President Lula da Silva also proposed that the Brics bank become a clearing house for a proposed Brics common currency. “Why can’t an institution like the Brics bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other Brics countries?” Lula asked early in the year during a visit to the Brics bank’s head office in Shanghai.
The bank plans to increase its lending in local currencies, to reduce its reliance on using the US dollar as the dominant currency of transactions. Only 22% of the bank’s transactions are in local currency. The bank wants to increase it to 30% by 2026. The bank has approved $30bn (R560bn) in loans. Two-thirds of its loan book was in US dollars. Maasdorp said the reality is the US dollar was where the largest pool of liquidity is.
Lending in local currency would reduce foreign exchange fluctuations and risks; and decrease the negative impact of US domestic interest rate variations which cause fluctuations in the US dollar, which undermine US dollar-based transactions around the globe. The value of the US dollar has increased, in relation to most emerging market currencies since the start of the Russia-Ukraine war, after the US central bank increased interest rates to tackle domestic inflation in 2022. This has increased the servicing of US dollar debt for developing countries.
Brics economies seek to reduce the use of the US dollar in trade. As part of its strategy to de-dollarise, the bank will this year lend in South African, Brazilian, and Indian currencies — either through currency swaps or debt issuing. Two years ago the bank made a commitment to provide $3bn (R56bn) to finance South Africa’s “Just Transition” from coal to renewable energy. However, South Africa has been unable to provide the projects to finance.
The bank is already lending in Chinese yuan currency. In fact, more than half of the bank’s lending has been in yuan. In May 2023, the bank raised 8.5bn Chinese yuan (R21.7bn) through a so-called Panda bond transaction, with the proceeds invested as part of the bank’s liquid assets. The Bank of China was the lead underwriter of the bond.
Panda bonds, or yuan-denominated bonds were first issued in 2005. Up to 100% of the net proceeds from these bonds may be remitted offshore in yuan and converted into other currencies.
The bank issued its first South African debt sale last week when it sold R1.5bn in bonds and in 2019, the bank registered an initiative to sell R10bn in debt on the Johannesburg stock exchange. The bank now plans to register to issue bonds in Indian rupees to the tune of $2.5bn (R46.6bn) over five years.
The bank could not issue a $1.06bn (R19.7bn) Russian bond, after it set up a rouble programme in 2019, because of Western sanctions against the country. The bank aims to increase the use of local currencies to not only reduce the risks of foreign exchange fluctuations but also as part of the Brics trade alliance’s strategy to de-dollarise.
Nevertheless, the bank still has a long way to go before it can compete with Western-dominated global development banks. The entry in January 2024 of six new Brics members — Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, in particularly the petrodollar countries, who will also become members of the bank, will not only boost, the geographic representation of the bank, but may bring in much-needed fresh capital and projects.
* William Gumede is Associate Professor, School of Governance, University of the Witwatersrand, and author of South Africa in Brics (Tafelberg)
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