BRICS' new development bank to focus on infrastructure funding, Brazil and India likely to be initial beneficiaries By Carlos Caicedo, Principal Latin America Analyst IHS Country Risk

Key points:

The creation of the New Development Bank (NDB) is the most

concrete decision taken by a BRICS summit. Until now, their

meetings were largely regarded as filled with ambitious statements

but little concrete action.

Foreign policy was a key driver behind bank's creation.

The NDB is not yet operational, but once it starts lending it has the

potential to match the role of multilateral development banks, while

offering the BRICS a tool to counterbalance Western influence in

international finance.

The role of the bank is likely to be modest initially, given the marked

disparity between the five economies and lack of clarity on decision

making. However, at a minimum, it is likely to become an additional

source for infrastructure funding, with Brazil and India posed to be the

main initial beneficiaries.

Analysis:

Foreign policy interests trump economics

The marked disparity between the five economies in terms of economic

structure, political institutions, and even demographic profiles poses

significant constraints for the launch of the NBD. However, the fact that

these differences have been overcome suggests this is a case in which

foreign policy interests trump economics. It is worth noting that the creation

of the bank takes place in a context of growing global political confrontation

between China, Russia, and the United States, and the reluctance of Japan

and the US to dilute their leading roles in existing supranational bodies.

BRICS object to US hegemony in IMF, IBRD

The creation of the NDB represents a political statement by the BRICS

members. They object to US hegemony in institutions such as IMF and

IBRD, and Japan in the ADB, and their statement is now clearer and better

established. In practice, after a period of time, the NDB will be a positive

factor for emerging markets and infrastructure funding, although it will only

account for a modest proportion of the total.

India alone wants USD1 trillion in five years. Total infrastructure plans for

the period up to 2020 are around USD4 trillion. If the NDB were to double

its capital to the full amount previously cited of USD100 billion and lend four

times this by 2020 (which would imply lending three times above the IBRD

each year from 2016–20, which appears extremely ambitious and therefore

unlikely), it could cover 10% of infrastructure needs in that period and

would then be fully extended. Yet even if it lends, for example, USD100–

200 billion in that time, at a micro level, and for individual countries and

projects, the NDB could be the difference between projects stalling and

being completed. As a result, it is unlikely to transform the global balance

between supply of funds to infrastructure development, and demand for

these. However, it is likely to represent a positive factor, and could be

crucial for specific projects or countries, once its priorities are determined

more clearly.

Only modest capacity to influence international capital markets and

global credit

Overall, the NDB will start to operate with a relatively modest capacity to

influence international capital markets and global credit. The bank is

unlikely to have the firepower to make major aggregate differences, via

direct investment, on the economic progress of countries benefiting from its

potential projects, especially if these include member states as recipients of

lending. This should not come as a surprise: after all, development banks in

countries such as Brazil (BNDES) have a much larger loan portfolio, and

are the genuine instruments of development finance in these countries.

Globalisation, bilateral trade agreements, and global investors do the rest.

##

Amanda Russo | Corporate Communications Specialist – EMEA | press@ihs.com

If you prefer not to receive email messages from IHS, please email amanda.russo@ihs.com. To read our privacy policy, click here.