What can be the impacts of the BRICS new financial institutions?
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Introduction: The diversity of sources of international development finance has increased dramatically in recent years Part1: BRICS group signed to create two new financial institutions during the sixth BRICS summit in Brazil in 2014 - New Development Bank (NDB) - Contingency Reserve Arrangement (CRA) Part2: China leverages its influence and capitalizes on emerging and developing countries with new financial institutions - AIIB and Silk Road Fund co-finance One Belt One Road (OBOR) - AIIB provides an addition to reduce infrastructure-funding gap in Asia Wrap-up: Understand features of the new development finance institutions and roles of regional finance
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What can be the impacts of the BRICS new financial institutions?
- 1. What can be the impacts of BRICS’ new financial institutions? Zih-Min Huang April 25, 2017 Emerging Economics and Societies, Sciencespo Paris 1
- 2. Agenda • Introduction: The diversity of sources of international development finance has increased dramatically in recent years • Part1: BRICS group signed to create two new financial institutions during the sixth BRICS summit in Brazil in 2014 a) New Development Bank (NDB) b) Contingency Reserve Arrangement (CRA) • Part2: China leverages its influence and capitalizes on emerging and developing countries with new financial institutions a) AIIB and Silk Road Fund co-finance One Belt One Road (OBOR) b) AIIB provides an addition to reduce infrastructure-funding gap in Asia • Wrap-up: Understand features of the new development finance institutions and roles of regional finance 2
- 3. The diversity of sources of international development finance has increased dramatically in recent years 3Source: Issue Brief Series by World Bank Group-Multilateral Development Banks Old and major multilateral development banks New MDBs created by BRICS • Support partner countries in achieving their development goals through financial support, technical assistance, and policy advice • Criticism of WB and IMF: impose numerous conditions on aid recipients • Urgent need of infrastructure and sustainable development projects • Counter Bretton-Woods-system MDBs (U.S. veto right) and risks of US dollars • Extensive collaboration: with MDBs, RDBs, and commercial banks in BRICS Source: Professor Stephany Griffith-Jones • MDBs can better deal with the risks of development projects High credit ratings Local knowledge Long-term Investments Significant regional presence Years of experience Strong technical capacities
- 4. BRICS group signed to create two new financial institutions during the sixth BRICS summit in Brazil in 2014 4Source: BRICS Ministry of External Relationship
- 5. Introduction of New Development Bank 6 • Established during the sixth BRICS Summit in Fortaleza in 2014 , with its HQ in Shanghai • Total initial capital: USD $100 bn • Shareholding structure: $10 bn from each BRICS and outsourcing the other half • Focus: INFRA and sustainable development Source: NDB Partnership with banks of different levels • Multilateral Development Banks • National Development Banks • Commercial Banks from BRICS Quick facts • $1.5 bn: the first set of loans involving financial assistance approved in 2016 • Prediction of loan-provision scale after 20 yrs • $350 bn: total value of a stock of loans • $34 bn annual lending (comparable to the current level of European Investment Bank annual lending) Current development
- 6. a) NDB aims to mobilize resources for infrastructure and sustainable development projects in BRICS, other emerging economies and developing countries 7 1. Massive savings and foreign exchange reserves: • Typically placed in sovereign wealth funds and invested in developed countries 2. Significant unmet needs: a shortfall of investment of USD $1 trillion annually 3. Private banks not willing to finance: • Due to long-term maturity and incurred high risks 4. The persistence of a major deficit: • Constrain future growth • A large proportion of population lack access to electricity and clean water Certain situations identified in emerging and developing countries Case study: Eskom (South Africa) • Power utility giant Eskom generates approx. 95% of the electricity used in SA and approx. 45% of the electricity used in Africa • Target sector: Transmission construction of renewable energy • Loan amount: USD $180 m • Usage of the loan: to connect households in areas where there is no electricity • Impact: 670 MW renewable energy evacuated (transmitted) and avoided 1,300,000 t CO2/year Source: NDB
- 7. List of all NDB’s 7 project accumulating USD $1.5 bn and comprising two sectors – 6 in renewable energy and 1 in transportation – across five founding members 8Source: NDB
- 8. 18 41 18 18 5Brazil China India Russia South Africa b) The Contingency Reserve Arrangement created to provide official liquidity and protect members from national currency volatility 9 China is the biggest investor and thus owns the biggest voting right in CRA Capital contribution (USD bn) and voting rihgts (%) of each BRICS country Overview of the CRA mechanism Source: BRICS Ministry of External Relationship • A framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures. • A liquidity instrument • A precautionary instrument • Ie. Members' national currencies are being adversely affected/ attacked by global financial pressures • Seen as a competitor to the IMF • BRICS take the lead to change the financial architecture of the world Total: USD $100 bn
- 9. 10 1. Asian Development Bank and World Bank not able to finance all the investment demands 2. China leverages its influence and capitalizes on emerging and developing countries: • Asian Infrastructure Investment Bank (AIIB) • Silk Road Fund • SilkRoad International Bank (SIB) When we focus on Asia and China’s regional strategies …
- 10. Introduction of Asian Infrastructure Investment Bank 11 • Purposes: foster sustainable economic development, improve infrastructure connectivity, promote regional cooperation and partnership in Asia, etc • Core principles: openness, transparency, independence and accountability • Mode of operating: Lean, Clean and Green • Total initial capital: USD $ 100 bn, whose 79.1% from the Asian Region • Major subscribers (>3%): China (32.3%), India (9.1%), Russia (7.1%), Germany (4.8%), Korea (4.1%), France (3.7%), Indonesia (3.7%), and U.K. (3.3%) Quick facts and numbers Source: AIIB
- 11. AIIB offers sovereign and non-sovereign finance for sound and sustainable projects in six areas 12Source: AIIB
- 12. a) AIIB and Silk Road Fund co-finance One Belt One Road 13Source: AIIB, McKinsey Several routes are proposed for the “New Silk Road” Fund demands accompanied by new projects • More than 200 enterprises have signed cooperation agreements for projects along OBOR’s routes, such as: • New rail links with Laos and Thailand • HSR projects in Indonesia • In order to finance the initiatives 1. The $100 bn AIIB initial capital established in 2014 2. The $40 Silk Road Fund established by China in 2014 3. Silkroad International Bank (SIB) opened in Jan 2017 to promote the financial sector development in Djibouti and in the entire Africa • Six corridors include the New Eurasian Land Bridge, China–Mongolia–Russia, China– Central Asia–Western Asia, Indo-China Peninsula, China–Pakistan, and Bangladesh– China–India–Myanmar.
- 13. b) AIIB provides an addition to reduce infrastructure-funding gap in Asia 14Source: ISEAS - Yusof Ishak Institute, Reuters, AIIB Unsatisfied infrastructure investment demand in Asia, esp. in Southeast Asia • According to ADB, during 2010-2020, Asian countries will need to invest: • $8.3 trillion in national infrastructure ($800 bn demand annually) • Extra $290 bn in regional INFRA projects in transport and energy • $13 bn: year lending capacity of ADB $50 bn before 2018 $23 bn in 2016 $ 500 bn for next 10 yrs First four projects launched by AIIB ADB’s co-financing projects with MDBs Source: ADB, U.K. Federal Ministry of Finance • Pakistan Road Project: historic milestone • ADB, leader financer ($100 m, loan), AIIB ($100 m, loan), and DFID ($34 m, grant) Fund needs: Thailand, Indonesia, and Vietnam
- 14. 12 projects approved by AIIB include energy, transportation, and multi sectors across Bangladesh, Indonesia, Pakistan, Myanmar, and Central Asian countries 15Source: AIIB Approved projects of AIIB (not all)
- 15. Wrap-up: Understand features of the new development finance institutions and roles of regional finance 16Source: South Africa Institute of International Affaires, German Development Institute How much money actually passes from the BRICS countries to their neighbors? Roles of regional finance Rationales and consequences of regional finance? • Trade initiatives and their consequences • Positive welfare effect of economic integration • Political motivations • Regional powers usually most directly benefit economically and politically from integration How is it loaned? A true alternative source? • The loans made on commercial terms or as concessional finance, or even grants? • The loans linked to firms or exports from the BRICS countries? • Any policy demands made alongside the loans? 1 2 3 New features worth highlighting Globally, a substantial shift in the international development finance architecture towards Southern-dominated institutions 1 Regionally, leadership of BRICS • Set-up of different rules • Implementation of growing strategies • Competition and collaboration with developing groups 2 China’s significant role • High foreign exchange reserves • Project finance, a way to export excessive capacity • Regional economic integration promoter 3
- 16. Bibliography • New Development Bank http://www.ndb.int/ ; Asian Infrastructure Investment Bank https://www.aiib.org/en/index.html • Asian Development Bank 2015 Annual Report https://www.adb.org/sites/default/files/institutional-document/182852/adb-annual-report-2015.pdf • Multilateral Development Banks, World Bank Group, August 2016 http://www.un.org/esa/ffd/wp-content/uploads/2016/01/Multilateral-Development- Banks_WBG_IATF-Issue-Brief.pdf • S. Griffith-Jones (2015), Financing Global Development: The BRICS New Development Bank, German Development Institute, 13/2015 https://www.die- gdi.de/uploads/media/BP_13.2015.pdf • S. Griffith-Jones, Li Xiaoyun and S. Spratt (2016), The Asian Infrastructure Investment Bank: What Can It Learn From, and Perhaps Teach To, the Multilateral Development Banks? http://www.stephanygj.net/papers/TheAsianInfrastructureInvestmentBankWhatCanItLearnFromandPerhapsTeachTotheMultilateralDevelopmentBanks2016.pdf • Z. Hong (2016), AIIB Portents Significant Impact on Global FinancialGovernance, ISEAS - Yusof Ishak Institute, July 15, 2016 https://www.iseas.edu.sg/images/pdf/ISEAS_Perspective_2016_41.pdf • K. Hochstetler (2015), BRICS in Their Region: Exploring the Role of Regional Finance, South African Institute of International Affairs https://www.saiia.org.za/special- publications-series/762-brics-insights-6-brics-in-their-regions-exploring-the-roles-of-regional-finance/file • ADB head will be "very happy" to work with China's Asia infrastructure bank, Reuters, May 2, 2014, http://www.reuters.com/article/kazakhstan-adb-banking- idUSL6N0NO1ZG20140502 • Chinese-funded Silkroad International Bank opens in Djibouti, China Daily, Jan 19, 2017 http://www.chinadaily.com.cn/business/2017- 01/19/content_27999949.htm • Treaty for the Establishment of a BRICS Contingent Reserve Arrangement – Fortaleza, July 15, BRICS Ministry of External Relations http://brics.itamaraty.gov.br/media2/press-releases/220-treaty-for-the-establishment-of-a-brics-contingent-reserve-arrangement-fortaleza-july-15 • R. Novosti (2014), BRICS currency fund to protect members from volatility - Russia’s top banker, Russia and India Report, July 17, 2014 http://in.rbth.com/world/2014/07/17/brics_currency_fund_to_protect_members_from_volatility_-_russias_top_ba_36767 • JC. Tian (2016), One Belt and One Road’: Connecting China and the world, McKinsey&Company, July, 2016 http://www.mckinsey.com/industries/capital-projects- and-infrastructure/our-insights/one-belt-and-one-road-connecting-china-and-the-world • Annual meeting of the Asian Infrastructure Investment Bank in Beijing, U.K. Federal Ministry of Finance, July 21, 2016 http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Press_Room/Publications/Technical-Papers/2016-07-21-annual-meeting-of-asian- infrastructure-investment-bank-beijing.html • ADB Approves First Cofinancing with AIIB for a Pakistan Road Project, Asian Development Bank, June 10, 2016 https://www.adb.org/news/adb-approves-first- cofinancing-aiib-pakistan-road-project 17
- 17. 18 Thank you for your listening. Any question?
Editor's Notes
- I’ll give a brief introduction and conclusion about international development finance. Part 1 will cover one instution and one mechanism created by BRICS, while part 2 will be more focused on Asia and China’s role.
- For the introduction, one fact we need to know: the diversity of sources of international development finance has increased dramatically in recent years. After the second world war, the Bretton Woods system created by Western countries, so as to set up a system of rules, institution, and procedures for intl monetary management. Besides, regional growth issues gained more attention from the 70s, so Asian Development Bank (ADB) and European Bank for Reconstruction and Development (EBRD) opened in 1966 and 1991. These institutions are so-called major multilateral development banks, a.k.a. MDB, which support partner countries through financial support, technical assistance, and policy advice. However, there’re certain concerns or criticisms on WB and IMF cause they usually impose numerous conditions on aid recipients, for example asking countries to conduct economic structural adjustment & enhance environmental and human rights conditions. On the other hands, emergences of regional powers after 2000, especially BRICS countries, they wanna increase their voice at the international level and dominate regional integration, thus BRICS create New Development Bank in 2014, while China gives birth to Asian INFRA Investment Bank in 2016. Besides, FYI, why MDBs matter, given that we already have so many kinds of financial institutions? Because MDBs can better deal with the risks of development projects. They have high credit ratings (which means cheaper cost of fund), long-term investments, strong technical capacities, years of experience, significant regional presence, local knowledge etc
- Part1. BRICS group signed to create two new financial institutions during the sixth BRICS summit in Brazil in 2014
- The main objectives of NDB operations Fostering development of member countries Supporting economic growth Promoting competitiveness and facilitating job creation Building a knowledge sharing platform among developing countries
- What’s NDB? It’s established during the sixth BRICS Summit in Fortaleza in 2014 , with its HQ in Shanghai. Total initial capital is set 100 billion dollars, in which each BRICS country put 10 billion and outsource the other half 50 bn. NDB clarifies its focus on INFRA and sustainable development. Besides, NDB also develops its partnership with banks of different levels, including MDBs, such as, World Bank, ADB, and EBRD. Then national development banks, and commercial banks from BRICS, like Bank of China, ICICI, a major bank in India, etc. As for the current development, even though the loan scale of NDB is relatively small, it’s predicted to have capacity to provide $34 billion annual lending after 20 yrs! One natural advantage is that 5 founding members of NDB include 42% of world population and 20% of global GDP, which means NDB has a large potential to become a strong MDB in the future. The main objectives of NDB operations Fostering development of member countries Supporting economic growth Promoting competitiveness and facilitating job creation Building a knowledge sharing platform among developing countries
- So the first point is that NDB aims to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries BRICS countries have massive savings and foreign exchange reserves as they’re major export countries for past few decades. According to German Development Institute, however, there’s a shortfall of investment of $1 trillion annually in emerging and developing countries, in the field of infrastructure and more environmentally sustainable projects. Private banks are usually not willing to finance these due to LT maturity and incurred high risks. So, here I talk about the case of Eskom. It’s a company who generates approx. 95% of the electricity used in SA and approx. 45% of the electricity used in Africa. Since it wants to develop transmission construction of renewable energy, but the shareholders didn’t prefer to use its own capital. It successfully applied 200 million loans from NDB, and use it to connect households in areas where there’s no electricity.
- List of all NDB’s 7 project which accumulate USD $1.5 bn and comprise two sectors – 6 in renewable energy and 1 in transportation – across five founding members
- The second point is that BRICS also created the Contingency Reserve Arrangement to provide official liquidity and protect members from national currency volatility. CRA, by BRICS’ definition in the article, is a framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures. While one member country’s national currency is being attacked or negatively affected by global pressures, CRA will use its instruments to stabilize violent fluctuations of that currency, in order to avoid huge currency depreciation or appreciation and subsequent economic chaos. For example, I don’know if any of you knows that during the 1997 Asian financial crisis, the Malaysian ringgit was heavily traded by speculators. This led to rating downgrades and a general sell off on the stock and currency markets. Why it matters? Coz it has been seen as a competitor to IMF. And it’s the first time that BRICS take the lead to change the global financial architecture with its own mechanism Total capital of CRA is also $100 bn China is the biggest investor and thus owns the biggest voting right in CRA
- For the second part, when we focus on Asia and China’s regional strategies … We notice two issues. One hand, Asian Development Bank and World Bank not able to finance all the investment demands. On the other hand, China leverages its influence and capitalizes on emerging and developing countries: with its new financial institutions. For the Silkroad International Bank, it’s the first Chinese-funded enterprise to obtain banking license on the African continent. It is also the first joint venture bank in Djibouti, a East African country.
- AIIB is created by China in January 2016 with purposes to : foster sustainable economic development, improve infrastructure connectivity, promote regional cooperation and partnership in Asia, etc. It’s total capital is also 100 bn, so we can remember this number coz it’s also the initial capital of NDB and CRA. China is the single largest share holder with more than 30% investment. At first, United States asked it’s alliances not to join ADB, however, except Japan who’s the leading country of ADB, almost all major European countries chose to become founding members of NDB.
- the Silk Road Fund, an investment fund with a total capital of USD40 billion. This was jointly set up by China’s State Administration of Foreign Exchange, China Investment Corporation, the Export-Import Bank of China, and China Development Bank
- “We (ADB) have about $13 billion of new lending, new approval each year, but we estimate the infrastructure needs of Asia and Pacific are $8 trillion for 10 years - $800 billion each year”, said ADB President Nakao Takehiko ADB cannot meet all the demand, and its operations mainly focused on Addressing growing income and social disparities Enhancing resource management, investing in innovation Responding to requests for emergency support Appropriate design of financial instruments: The quality of the loans being made by the new development banks The degree of financial “sophistication” of the instruments used