Daniel Mminele: The role of BRICS in the global economy
Address by Mr Daniel Mminele, Deputy Governor of the South African Reserve Bank, at the
Bundesbank Regional Office in North Rhine-Westphalia, Düsseldorf, Germany,7 July 2016.
* * *
There may be minor differences between this version of the speech and the delivered German version.
1. Introduction
Good evening and thank you to Dr Andreas Dombret, member of the Executive Board of the
Deutsche Bundesbank, and Ms Magarethe Müller, President of the regional office of the
Deutsche Bundesbank for the opportunity to address you today on the topic of "The role of
BRICS in the global economy". Admittedly, this may have been a much easier topic a few
years ago when the successes of the BRICS economies far overshadowed their
weaknesses. As the challenges facing the BRICS economies have mounted, there are now
many question marks over the economic power of the BRICS grouping and the ability to
realistically challenge and change the global economic order to one which is more
representative and fair.
Indeed, BRICS is not alone in the many challenges that it faces. Both advanced and
emerging economies have slowed with each facing their own set of dynamics adversely
impacting growth and which inter alia require bold actions in the implementation of much
needed structural reforms.
It seems appropriate to be delivering this speech in the heart of Europe, a region which has
vast trade linkages with the BRICS economies and where the economic influences are
strong.
I would imagine that developments in Europe and the many challenges that this region has
been confronted with lately, have occupied more of your attention than BRICS matters have.
European developments have certainly occupied the attention of policymakers in BRICS
countries since, as we all know, we live in a highly interconnected and interdependent world
with significant spill-overs across countries.
South Africa takes a keen interest in Europe, given large trade linkages and therefore
significant implications for our economic prospects. The relationship between South Africa
and Germany in particular, has been a long and fruitful one and certainly the contribution to
South Africa's development has not been insignificant. There are a large number of major
German companies represented in South Africa, in particular in the automobile sector, as
well as a number of small and medium sized enterprises. Approximately 600 German
companies have operations in South Africa, employing over 90,000 workers1. Such a
presence contributes significantly to employment and skills-building, and no doubt, towards
technological advancement in South Africa.
But let me turn to the topic of the speech. I will discuss BRICS in the South African and
global context, more recent developments in terms of the slowdown in BRICS economic
growth and focus on the successes of the BRICS countries. I will conclude with a brief
update on economic developments in South Africa, which could be of interest to some of
you.
2. BRICS and South Africa
The BRIC countries, as the grouping was initially known, admitted South Africa as a member
to the club in December 2010. There were many criticisms levelled towards the inclusion of
South Africa in this grouping, with the perception that South Africa's economic size was just
too small for it to have any benefits for the BRIC. However, if one considers the country's
large mineral resources; very well developed, deep and sophisticated financial markets;
strong institutions and robust and expanding infrastructure programme, then surely South
Africa's presence in this grouping is not misplaced. In addition to South Africa being the only
African member of the G20, its inclusion into the BRIC group provides it with a more
representative structure and further emphasises the BRIC countries commitment to
strengthening their presence and engagement in Africa.2 Indeed, within the Sub-Saharan
Africa (SSA) region, South Africa is the second largest economy, accounting for 21 per cent
of SSA GDP. SSA is an important export market, and there are significant financial linkages
in terms of foreign direct investment and a strong presence of South African firms in the
South African Development Community3.
South Africa's trade with BRIC countries has expanded in recent years, as exports to BRIC
countries grew from R20 billion in 2005 (EUR1 billion), to R154 billion (EUR9 billion) in 2013
(although this has since slowed to R147 billion (EUR8.5 billion) in 2015). Imports have
similarly increased from R48 billion (EUR2.8 billion) in 2005 to R277 billion (EUR16 billion) in
2015.4 Much of the exports are destined for China, which accounts for 64 per cent of South
Africa's exports to BRIC, followed by India accounting for close to 30 per cent. The bulk of
exports to BRIC countries consist of mineral products, although the percentage of mineral
products in total exports in China, for example, has declined from levels of close to 80 per
cent to 60 per cent in 2015. This most likely reflects to some extent the slowdown in China.
In terms of imports from BRIC countries, China accounts for 72 per cent of South Africa's
imports from BRIC, followed by India with approximately 20 per cent. Most of the imports
from China relate to machinery products and in India's case, mineral products. Thus, while
trade with BRIC countries has expanded, there has been a slowdown in export growth more
recently, with a consequent increase in the trade deficit with BRIC countries.
3. BRICS in the global context
Increased globalisation has meant that BRICS has become an important source of global
growth and political influence. BRICS economies have grown rapidly with their share of
global GDP rising from 11 per cent in 1990 to almost 30 per cent in 2014. BRICS account for
over 40 per cent of the world population, hold over US$4 trillion in reserves and account for
over 17 per cent of global trade.
Financial markets in the BRICS countries have similarly expanded in a rapid manner. For
example, in the 20 years until 2010, Brazil's market capitalisation increased from a very low
4 per cent of GDP to 74 per cent, India from 12 per cent to 93 per cent, Russia and China
from almost zero to 70 per cent and 81 per cent, respectively. In South Africa, market
capitalisation has more than doubled from 123 per cent to 278 per cent. According to S&P
Global Market Intelligence global bank rankings, banks from these five countries figured
among the top 100 banks in the world, with the top 4 banks headquartered in China.
It therefore comes as no surprise then that these economies became the new engines of
global demand. Having been victims of the global financial crisis, and suffering the impact of
large and volatile capital flows and what Mohamed El Erian has referred to as "tourist
dollars"5, the BRICS countries were propelled into a common objective of reforming the
international financial and monetary system, with a strong desire to build a more just, and
balanced international order that reflects the dynamics of today's global economy and serves
the interests of all in a fair manner. To this end, the five countries in the BRICS community
play an important role in the G20, in shaping global economic policy and promoting financial
stability.
4. The future role of BRICS
Following an impressive performance in the aftermath of the global financial crisis, BRICS
countries have recently started to slow. In this respect, there seems to be an awful lot of
doom and gloom bandied about the BRICS in some quarters. Some have referred to the
BRICS bubble bursting, others have noted that BRICS "instead of propelling the global
economy into calmer waters, now risk capsizing it" and others question "why the mighty
BRICS nations have broken?"
This slowdown has been reflected in a number of areas. Exports from BRICS to developed
markets and investments into their respective economies have declined, while the collective
contribution to global growth has fallen from a peak of nearly 50 per cent in 2013 to around
36 per cent in 20156. Real GDP growth of BRICS, which was over 8 per cent in 2010
declined to just over 4 per cent in 2015. In addition, the local currencies of BRICS, with the
exception of China, has experienced varied levels of volatility following the onset of the
global economic crisis.
As Christine Lagarde noted in a recent speech7 there have been three particular challenges
confronting the global economy and also the BRICS countries. First is China's growth
transition and the rebalancing of its economy from industry to services, from exports to
domestic markets, and from investment to consumption. In the short run, this will lead to
slower growth with spill over effects through trade and lower demand for commodities. Global
trade, which fell to 20 per cent below its pre-crisis trend, was driven by sluggish growth in
advanced economies, and the maturation of global value chains which has further reduced
the elasticity of trade flows to economic activity and exchange rate changes. Furthermore,
higher capital requirements and tightened financial regulations have reduced banks'
willingness to extend trade finance, and the pace of trade liberalization slowed. Secondly,
declining commodity prices has placed many commodity-exporting emerging economies
under severe stress with very large currency depreciations in some cases and has set back
growth in commodity-exporting BRICS. Third, asynchronous monetary policies has
contributed to an appreciation of the U.S. dollar, putting considerable strain on emerging
market currencies. Meanwhile, net capital flows to BRICS have undergone significant bouts
of volatility, which have weighed on investment growth.
Until 2013, the slowdown was predominantly driven by external factors, however, the role of
domestic factors has increased in the past two years and have come to the forefront as the
predominant forces behind slowing growth in BRICS. This reflects declining potential growth,
compounded by a deterioration in fiscal positions of BRICS and political dynamics which
have dented confidence and increased pressure.
The question then is, does BRICS still matter and should it occupy so much of our attention?
BRICS account for about two-thirds of emerging market GDP. The World Bank has
estimated that in the event that growth in BRICS economies fell one percentage point below
expectations, this would knock 0.8 percentage points off growth in other emerging markets
over a period of two years and reduce global growth by 0.4 percentage points. The effects of
a BRICS slowdown on other emerging markets and the global economy are significantly
worse if one assumes that financial sector turbulence will also accompany the slowdown.8
These effects are a result of unintended knock-on effects, in the form of financial, trade and
economic spill-overs. In this context, the BRICS are at an important juncture and the
question is how does BRICS emerge from the current dismal conjuncture? It should be noted
that the slowdown of BRICS hampers the scope for a speedy recovery of the world economy
given the much greater weight of BRICS in the global economy.
As we have heard time and again, a combination of proactive countercyclical policies and
structural reforms are needed to reinvigorate domestic economies and economic growth.
While the recipe for success are of course not the same for all, the ingredients for success
are mostly the same and include inter alia encouraging greater private sector investment,
labour market reforms, stronger protection for intellectual property rights, and addressing
infrastructure bottlenecks, amongst others. Given the sheer size, vast resources and youthful
populations of the BRICS countries, the potential of this grouping for both domestic and
global outcomes is beyond question. Indeed, recessions in Brazil and Russia and slower
growth in South Africa are expected to bottom out this year, while China may experience only
a modest slowdown and India continues to expand at a robust pace.
This brings me to the next point of my speech, which is the progress that BRICS has made in
terms of collaborating and setting up institutions to help address common challenges and
risks that lie ahead.
5. The achievements of BRICS
The BRICS grouping have achieved much since the first political dialogue in September
2006 and the first BRIC Summit which took place in June 2009. In the seven years since the
first Summit, the BRICS countries have established the New Development Bank (NDB), and
the Contingent Reserve Arrangement (CRA), amongst other initiatives. In my view, these are
quite significant achievements in a relatively short period of time. For the purposes of this
talk, I would like to focus on these two initiatives.
The establishment of the BRICS NDB marked a milestone in BRICS co-operation and as
mentioned by some analysts is a testament of the "coming of age" of these countries in the
world of development finance. Others have mentioned that the NDB was established to
challenge the post-Second World War international economic order, that is, the Bretton
Woods System. However, as has been indicated previously by many other BRICS
colleagues, one of the objectives of the NDB is to promote South-South co-operation and to
better serve the needs of developing countries through the promotion of infrastructure and
sustainable development. Against this background, the NDB should rather be seen as a
complement to, rather than a challenge or as competition to existing Bretton Woods
institutions. In the future, the World Bank and the NDB may look to co-operate and by so
doing, enhance the international development financing system.
The NDB is well under way in mobilising resources for infrastructure development projects.
The NDB has appointed its first President and has a fully functioning Board of Governors and
Board of Directors. The NDB has already disbursed its first funds for renewable energy
projects in all five BRICS nations, while the NDB Board has also approved the first five year
Yuan bonds. The NDB is in the process of seeking an international rating where after
issuance on international markets will be pursued.
What makes the NDB a "new" development bank. Firstly, it has new financing sources in that
the financing will come from the world's major developing economies, within the framework
of new South-South co-operation. Secondly, the financing is largely devoted to meeting the
needs of developing countries for infrastructure development. This is different because
MDBs are largely devoted to reducing global and regional poverty along with many other
priorities, which limits the finance available for infrastructure development. Thirdly, it has new
financing mechanisms which focuses on a more equal and balanced development
partnership in the relations between major developing countries and with their smaller
developing counterparts. The NDB plans to use market-oriented operations to reduce loan
costs and provide innovative loan facilities so that developing countries will have a more
robust, flexible and customer-oriented development finance service.9
The CRA Treaty of the BRICS countries was signed in July 2014 and came into effect a year
later with the finalisation of all the operational requirements pertaining to the Treaty. The
CRA is basically a self-managed contingent reserve arrangement to forestall short-term
balance of payments pressures, provide mutual support and further strengthen financial
stability. Once again, as with the establishment of the NDB, the CRA is not meant to replace
any financing arrangements under the IMF, but is rather a complement to existing
international monetary and financial arrangements and in the main helps to strengthen the
global financial safety net. The arrangement is important because it provides the possibility to
quickly obtain additional liquidity in the event of a crisis. As yet, none of the BRICS countries
have had a need to call upon the CRA.
There are a number of new initiatives being discussed under the BRICS agenda, with a view
to furthering the work already undertaken and cementing the progress that has been made to
date.
Allow me now to briefly touch on recent economic developments in South Africa, before I
conclude my address today.
Recent economic developments in South Africa
The South African economy has slowed in recent years, from growing by almost 6 per cent
prior to the global financial crisis, to a mere 1,3 per cent in 2015. In the first quarter of 2016,
growth contracted by 1,2 per cent. South Africa has been buffeted by a number of negative
developments, namely, the slowdown in China and reduction in commodity prices; weak
demand in advanced and emerging market economies, as well the deterioration in growth
prospects for the Sub-Saharan Africa region; policy uncertainty; and suffering one of the
worst droughts on record during 2015/2016. According to the SARB's most recent forecast
the economy will only grow by a meagre 0.6 per cent in 2016. However, the Bank expects
that the first quarter GDP number represents the low point, and a slow upward trend is
expected going forward. This view is consistent with the favourable developments in a
number of indicators, such as the Barclays Purchasing Managers Index for the
manufacturing sector and an increase in the real value of non-residential building plans
passed. A modest recovery is expected in the next two years, with growth forecast at 1,3 per
cent and 1,7 per cent respectively.
Amidst a worsening growth outlook, the inflation outlook has also deteriorated with an
extended breach of the 3 - 6 per cent inflation target expected, while inflation expectations
remain at uncomfortably high levels. The exchange rate remains one of the biggest risks to
the inflation outlook and highly sensitive to domestic political developments and the
everchanging risks associated with US monetary policy. Brexit is a further factor whose full
impact on South African financial markets and the economy is still unknown. South Africa's
policy rate has been adjusted upwards by 200 basis points since January 2014, in line with
rising inflation risks. However, it is quite obvious that the Monetary Policy Committee (MPC)
faces a policy dilemma as reflected by the inflation and growth dynamics. The South African
Reserve Bank operates within a flexible inflation targeting framework, and this requires
carefully calibrated policy decisions. These decisions need to appropriately take account of
the evolving international and domestic economic and financial markets environment. They
also need to protect the credibility of the framework in managing inflation expectations. And
while policy decisions need to be sensitive to growth dynamics, they also need to take into
account that monetary policy cannot address structural deficiencies holding back the
economy.
Conclusion
Let me then conclude by saying that the challenging times we face as the BRICS are by no
means unique to us. Indeed, the entire global economy is at a difficult juncture at present.
While we may have emerged from the global financial crisis, the recovery has by no means
been as robust as one would have liked.
The challenges we face need to be tackled decisively and provide us with the opportunities
to implement meaningful reforms, which ultimately can lead to strong, sustainable and
balanced growth. Such efforts are well underway. What has been broken can certainly be
fixed, and I have no doubt that the BRICS, along with the rest of the global economy, through
better co-ordination and collaboration will emerge stronger.
Thank you.
References:
www.nkibrics.ru/system/brics/.../BRICS_AND_THE_GLOBAL_ECONOMY.pdf
BRICS and the Global Economy, Dr Bandi Ram Prasad, Financial Technologies Knowledge
Management.
BRICS Insight Paper 2, New South-South Co-operation and the BRICS New Development
Bank, by Zhu Jiejin.
The Role of Emerging Markets in a New Global Partnership for Growth, By Christine
Lagarde, Managing Director, International Monetary Fund, University of Maryland, February
4, 2016.
BRICS Joint Statistical Publication 2015.
South Africa in BRICS, www.brics5.co.za/.
www.ndbbrics.org.
Statement of the Monetary Policy Committee, 19 May 2016.
World Bank Global Economic Prospects 2016.