Comments from Matheus Zani
The BRICS group finds itself at a geopolitical crossroads. Its ambitions are clear: become a tangible alternative to the G7, create a new ‘multipolar’ world order that shifts power away from the Western and end the US dollar’s reign as currency of choice for global trade, potentially via the introduction of its own common currency.
The path to achieving these ambitions is a little harder to see. Afterall, when the president of one of your founding members is the target of an international arrest warrant for allegations of war crimes, stability is always going to be a struggle. Especially when your newest member sits on the court issuing the warrant. And that’s before you even get into the wildly different economic situations across the five nations that make up the group: Brazil, Russia, India, China and South Africa.
And yet, these are times of optimism for BRICS. The group, whose name originated from an acronym used by US asset managers, is now an official bloc with its own bank, a combined population of over 3 billion people (roughly 40% of the world) and a clamor from some of the biggest players in world politics to join its ranks.
This guide will look at the present and future of the BRICS, where overseas investors can find challenges and opportunities and, as ever, how so much of this hinges on the inflation situation across the five countries.
The Current State of BRICS
While the BRICS currently consists of the five nations represented in the group’s name, this won’t be the situation for long. According to reports, as many as 19 countries have officially applied to join including Saudi Arabia, United Arab Emirates, Egypt, Argentina, Indonesia and Bangladesh. "The main goal of the existing members of BRICS,” says Matheus Zani, Head of Latam at Deaglo, “is to reduce their dependence on the dollar. This is one reason why membership is attracting so much attention." This inclination, he says, stems largely from recent concerns about US reliability, particularly in light of its recurring debt ceiling crises, divisive politics, and controversial foreign policies, no more so than the US’s decision to freeze Russia out of SWIFT.
As an organization, the mood may be upbeat but the economic and political situations in many of its member states are less so. China’s economic slowdown is causing alarm bells worldwide, South Africa is experiencing rolling blackouts and Russia remains a pariah for many following its invasion of Ukraine – with inflation impacting all three in different ways and concerning overseas investors. Brazil and India, on the other hand, are making progress on curbing inflation, sparking cautious investor optimism towards the two economies.
While this variation is not a problem for the bloc in and of itself, it does pose a significant risk to BRICS’ latest fixation: a common currency.
A BRICS Currency?
As Deaglo CTO Paul Stafford said in his recent ‘A de-dollarized world’ article, “a number of economies have been trying to ease their reliance on the dollar for a while,” in at attempt to shift power away from the US and, more recently, remove themselves from the firing line of the sort of currency weaponization that saw $330bn of Russian oligarch-owned global reserves frozen overnight. As the G7’s main real alternative –and considering Russia and China are founding members– the de-dollarization drive is particularly strong among the BRICS nations, with a common currency actively being discussed.
What this currency could actually look like is up for debate. The Russian Finance Minister, Anton Siluanov, has said that rather than thinking of it as an alternative currency, he “would probably call it a payment unit inside the BRICS countries” that would initially settle trade between BRICS countries, echoing Putin’s June comments that BRICS were working on a new-reserve currency based on a basket of its member countries’ currencies. Other reports have suggested the currency would be centered around the so-called ‘BRICS bank’, i.e. the Shanghai-based New Development Bank (NDB), a BRICS-run bank set up in 2015 to lend to development projects in emerging economies.
With a common currency like the euro unlikely, something similar to the IMF’s SDR is the most obvious option, but this is fraught with problems. As Paul McNamara wrote in the FT in February, “The problem is that BRICS is not an especially useful economic term. It marries an economic superpower in China with a potential one in India with three essentially stagnant commodity exporters.” The diverse inflation rates across the BRICS nations present a significant obstacle too, says Zani. “South Africa, for example, is currently facing severe inflationary pressures, while Brazil, thanks to its strong and autonomous central bank, is now handling inflation well. This clearly has an impact on their currencies, many of which have a serious history of volatility.”
Building a basket-tied common currency around those currencies, even one solely for cross-border trade, would be a high risk strategy. That’s before you even consider the countries vying to join BRICS. Current Brazilian inflation, for example, is at a two year low. In the first five months of 2023, inflation in Venezuela, one of the countries keen to join, reached 96.3%. How can those two currencies co-exist in a stable basket? “It'd be very complex,” thinks Zani, "it'd require extensive coordination, economic convergence, and political will and member countries to surrender a lot of authority over their monetary policy and pledge to adhere to a fiscally responsible policy focused on stability.” This feels like a big ask considering the differing political ideologies among the member nations and the fact that two of them are actively fighting each other.
What is likely, however, is a more established trade network and economic bloc (I.e. the eurozone sans euro) which would create significant FDI opportunities along with considerable anxiety for Western economies.
The Risk Perspective: Nation-by-nation
Since the election of Lula da Silva in October, overseas investors have been keeping a close eye on Brazil to see whether the nation’s inflation could be curbed. For now at least, that’s been achieved, with inflation at a two year low and the real soaring.
Lula’s eco-credentials have perked the ears of ESG-minded investors (although, as we pointed out earlier this year, green energy investment in Brazil was already soaring under Bolsonaro). However, says Zani, it's the country’s escalating internet access that is providing real opportunity for tech companies. “It’s a country of around 200 million people and tech companies can penetrate the market quickly and scale very easily."
Above anything else, says Zani. “Brazil is simply too big a market for foreign investors to overlook."
Russian inflation remains high, with analysts predicting it will end the year at 5.4%. The central bank's target is 4%. While this is undoubtedly off putting for investors, the country’s main blocker for international investment, especially in the West, is its invasion of Ukraine and subsequent pariah status.
Inflation in India continues to fall and as of May 2023 is now only just above the midpoint of the Reserve Bank of India's (RBI) 2-6% target range, with rising prices kept in check by lower input costs and regular government intervention to curb price spikes. Although a long way from its 7.8%YoY peak in 2022, analysts are predicting that this is the lowest it’s going to get for a while. The RBI-set interest rates remain high at 6.5% but this could be cut later in the year.
Despite its struggles, the sheer size of the Indian economy means it has remained attractive for foreign investors. Curbed inflation should only boost that.
In China, inflation is so low it’s now a problem, leading the central bank to inject resources into the market to stabilize it. The overall economic situation is not great either, with one Business Insider article recently stating: “China’s economy is way more screwed than anyone thought.” Debt and property market problems are adding more pressure to the superpower’s inflationary woes, while ongoing geopolitical tensions with the US, Taiwan, and India are also lessening the country’s appeal to overseas investors.
The South African economy has not been having a good time of late. May saw the tenth interest rate hike in a row, taking it to a 14-year high of 8.25%. The rand is seriously down, while inflation, although declining, remains high at 6.3%.
Much of this turmoil is being driven by a record number of blackouts that have hampered economic activity over the past year, costing an estimated $50m in lost output each day.
Is Revolution in the Air?
At its latest summit in Cape Town, the bloc released a group statement detailing the discussions, stating: “Ministers underscored the importance of encouraging the use of local currencies in international trade and financial transactions between BRICS as well as their trading partners.” This softly worded statement belies the seriousness with which the BRICS nations are taking their mission.
Expansion plans are in motion with details set to be revealed at August’s BRICS summit along with more detailed currency plans. And while that common-currency seems a high risk move considering the variations in inflation and economic stability, the BRICS’ desire to shift the balance of power is clear.
This shift will be easier said than done. Reports that the NDB, built to challenge the dollar, is in need of USD to repay its debts exemplifies more than anything.
For overseas investors, however, there are opportunities on the horizon. The bloc offers an intricate blend of challenges and opportunities that promise to shape not only the futures of its member nations but also the global economy's trajectory in the years to come. The journey toward achieving its goals may be complex but the potential payoff - a new power bloc capable of influencing global economics - could be revolutionary.
The New Acronym?
The most important thing, of course, is which acronym comes out on top once all the new members join (or if any leave?). We’ve come up with a few suggestions.
There’s the ‘Current-members-of-the-NBD’ edition: BRIBECSU
Brazil, Russia, India, Bangladesh, Egypt, China, South Africa, UAE
The ‘everyone-who-attended-the-latest-Brics-summit-in-Cape-Town’ edition: BRIICCS BANG BEAGICKS:
Brazil, Russia, India, Indonesia, China, Cuba, South Africa (BRIICS) Bahrain, Algeria, Nigeria, Gabon (BANG) Bangladesh, Egypt, Argentina, Guinea-Bissau, Iran, Comoros, Kazakhstan, Saudi Arabia (BEAGICKS)
Or our personal favorite – although this one would require some pretty hefty geopolitical maneuvering: BEST MATES
Brazil, Egypt, South Korea, Taiwan (BEST), Malaysia, Arabia, Turkey, Ethiopia, South Africa (MATES)
Or a Middle Eastern bloc: BISCUITS (Bahrain, Iran, Syria, Cyprus, UAE, Iraq, Turkey, Saudi Arabia)
We’ll stop. But let us know your suggestions on LinkedIn.