STUART THEOBALD: SA is a Brics minnow but a big NDB fish

Commentators are quick to play down the importance of SA in Brics. At one level, the grouping is heavily dominated by China, which has an economy more than twice the size of the other members’ combined. With SA making only a 0.4% contribution to nominal global GDP, it hardly adds much heft.

But in the one serious institution to have emerged from the Brics grouping so far, the New Development Bank (NDB), SA is playing an outsize role.

BRIC (as it was then) started to form in 2006 when the four foreign ministers of the original states met on the sidelines of the UN General Assembly. In 2010, SA joined after being invited formally by China and from then the group was known as Brics. Clearly, SA’s inclusion was more political than economic, providing a foothold in Africa and the outsize weight SA then had in international affairs.

The NDB was agreed four years later, and is now a fully operational bank with $10bn in paid up capital and 225 staff. The five founding countries have equal votes of about 18%; Bangladesh, Egypt and United Arab Emirates have since joined with smaller shares.

Countries can join the bank through a separate process to the overall Brics bloc, so the bank and Brics will not be synchronous in membership. The bank’s highest governance structure is a board of governors, made up of the finance ministers from its shareholder countries. That means there is some distance between the politics of Brics and the bank itself, though it might be a fairly short one.

The NDB plays a big role in SA. At the time of the budget in February, the SA sovereign had borrowed $3bn from the bank, making it by far the biggest lender to the government among international financial institutions (the next biggest, the World Bank, is owed a bit more than $1bn). It has also funded several projects at state-owned enterprise (SOE) level, including Eskom, Transnet, the Industrial Development Corporation and the Development Bank of Southern Africa (the World Bank also lends at subsovereign level, particularly about $4bn to Eskom).

The five founding countries each contributed $2bn in capital to the bank, so SA is net cash-flow positive. Each of the member countries agreed additionally to $8bn of callable capital, basically further shareholder funds they must contribute if the bank needs it, which ensures it has an AA+ credit rating (the second-highest possible). To cover that, the National Treasury is carrying a contingent liability of R134bn.

So, while economically SA is a minnow in the Brics pond, it is substantially entangled in the balance sheet of its bank. The NDB doesn’t provide consolidated disclosure of just how much it has lent to its member countries, but  it does disclose individual project facilities granted. In March, the NDB had total loans of $14.8m on its $27.2bn balance sheet, meaning its loans to the SA sovereign account for 20% of the bank’s loan book, in line with its shareholding, but further loans at SOE level mean SA exposure is larger.

The bank’s engagement with SA was further strengthened in August with the issue of a R1.5bn local currency bond in the SA market as part of a R10bn programme. This enables the NDB to use rand funding to lend to SA projects. It isn’t common for international financial institutions to raise local currency funding, but this shows the somewhat different approach of the bank in seeking to reduce reliance on the dollar.

About two-thirds of its balance sheet is in dollars, with the renminbi accounting for 17% (it has issued several yuan-denominated instruments, as well as in several developed market currencies). While there are no directly comparable instruments, the yield NDB was able to issue at was probably lower than the SA government could have issued at. That suggests a sustainable economic value of NDB to SA: a source of cheaper funding than direct issuance.

It will be interesting to see how the NDB builds its portfolio of SA loans. It might concentrate its exposure to the SA government, funding projects by state-owned enterprises and the central government balance sheet, though its mandate includes lending to private sector projects. The bank’s portfolio is dominated by transport infrastructure (33%) and clean energy (11%) projects. The NDB is keen to project itself as complementary to the existing international financial architecture rather than competing with the likes of the World Bank.

Apart from the NDB, Brics has not yet created much institutional structure. There is the Brics Contingent Reserve Arrangement, in which SA is a much smaller contributor, which is intended to support members’ currencies in the event of crises, competing with the IMF. Besides that, Brics is driven more by vision than reality. There has been talk of everything from a joint undersea cable that will be free of US spying to a common payments system, but none of these have yet got off the ground. There are also no trade agreements, despite regular talk of creating a free-trade bloc. In the one real outcome so far, SA has managed to gain significant participation and benefit, disproportional to its economic clout.

The expansion of Brics that was announced at the summit two weeks ago does not necessarily mean the expansion of the bank’s members or capital base, though it probably implies it. The bank risks becoming a tool to offer new Brics members a tangible return for their involvement in the bloc, something SA will need to defend against, both to manage the risk to its capital invested and its access to lending. Given the clout it now has in the bank, it could succeed.

Stuart Theobald is chair of Krutham.

This article first appeared in Business Day