Is BRICS inhabiting a parallel universe?

2016-10-19

South African finance minister Pravin Gordhan was conspicuous by his absence from this year’s BRICS summit in Goa, India, this week. He was too busy at home fighting for his political survival – and that of his country.

President Jacob Zuma, leaving the dirty work in his increasingly messy fray with Gordhan to his minions back home, was happily abroad jiving with Kenyan President Uhuru Kenyatta and attending a whole range of meetings, including of course the Goa summit, with several other cabinet ministers and business leaders.

A pity because Gordhan’s views on the Goa summit would have been interesting to hear.

At the BRICS summit that South Africa hosted in Durban in 2013, the five member countries agreed to establish their own Internet, separate from the one that you and I and the rest of the world are using. The leaders seemed to have been provoked into doing this by revelations that US intelligence had been cyber-spying on foreign leaders, including then Brazilian president Dilma Rousseff.

Gordhan was asked by a journalist after the summit if it was not absurd for BRICS to try to create its own discrete Internet, since universality seems to be essential to the whole concept. He snapped back that the journalist needed to get up to speed with political reality.

BRICS has not yet established its own Internet, as far as one can tell. Given the Chinese government’s total occupation of its own cyberspace, the concept of a BRICS Internet has slightly sinister connotations.

So what would Gordhan have thought of another seemingly Parallel Universe (or, some would say, balanced) project agreed on at the Goa summit – for BRICS to establish its own credit rating agency?

Many commentators see the need for an alternative credit rating agency

Clayson Monyela, spokesperson for the South African Department of International Relations and Cooperation, triumphantly tweeted the news from Goa. And it was hard not to detect in the reaction of members of the Zuma camp, a middle finger being shown to the big three private, US-based rating agencies, Standard and Poor’s, Moody’s and Fitch, which are playing such a pivotal role in the Zuma-Gordhan struggle for South Africa’s fiscus.

Responding to Monyela, one random tweeter articulated that sentiment best with this remark: ‘It is tough 2 move frm Western bullies but we hv 2. They hv agents in the country & worse in cabinet. Let's soldier on #BRICS.’ Opposition Democratic Alliance finance spokesman David Maynier was however sceptical, retweeting Monyela with the comment: ‘You mean a BRICS counter-Ratings Agency?’ Many others on Twitter shared Maynier’s sentiment.

University of KwaZulu Natal’s Patrick Bond noted in an article in The Conversation that South Africa’s energy parastatal Eskom was in the process of negotiating a US$5 billion loan from China so South Africa could argue the case for self-financing a nuclear programme, likely to be acquired from Russia or China.

‘In this context, a new BRICS credit rating agency with loose standards may just be another excuse to put future generations of South Africans deeper into debt, while facilitating corrupt dealings.’

Nonetheless many commentators see the need for an alternative credit rating agency to the big three agencies which failed so badly to do their job during the 2008 global financial meltdown.

And the BRICS agency also has a credible immediate cause. Kundapur Kamath, President of the New Development Bank (NDB) – or BRICS Bank – said at the summit that a BRICS credit rating agency was necessary because the big three private agencies were refusing to give the NDB the top AAA rating as the BRICS countries sponsoring it were not themselves AAA-rated.

That was increasing the price of the loans it was trying to raise and was therefore constraining the growth of developing countries, Kamath told the BRICS Financial Forum in Goa. Kamath said the conservative lending policies demanded of multilateral banks like the NDB were also stifling the growth of developing countries.  

He questioned why a bank like NDB had to limit its leverage to just three times its capital reserves, despite lending to sovereigns, whereas a commercial bank could lend up to nine times its reserves, despite taking higher risks.

Would a BRICS rating agency that rates a BRICS bank not be a conflict of interest?

Kamath said it was time for developing countries to sit down and talk to the rating agencies because if they changed their approach a whole lot more money could be released for development.

Earlier, Yaduvendra Mathur, Chairman of India’s Exim Bank, also backed the BRICS credit rating agency, saying it would bring down his borrowing costs. He told India’s PTI news agency that while Exim Bank had an AAA rating domestically, it couldn’t get one internationally.

He also suggested the big three rating agencies, which controlled 90% of the market, had a basic conflict of interest, because they made issuers pay for ratings rather than investors.

It was precisely that inherent conflict of interest that was exposed during the 2008 global financial crisis when the big three continued to give the highest ratings to major institutions to issue investments which were just fancy packaging for loads of worthless ‘sub-prime’ mortgages.

Nevertheless, if Standard and Poor’s, Moody’s and Fitch have conflicts of interest, would a BRICS credit rating agency that had to rate a BRICS bank not raise the same doubts? Indian Prime Minister Narendra Modi insisted the agency would be set up independently of the four governments. But it might be hard nonetheless to convince investors and lenders it would be objective and credible.

Prof Daniel Bradlow, SARCHI Professor of International Development Law and African Economic Relations at the University of Pretoria, agrees that the objectivity and independence of both the big three agencies and the proposed BRICS credit rating agency are questionable.

‘However the creation of a new agency will create competition and offer investors, issuers and other stakeholders more choice and more diversity in views on creditworthiness. In this sense the BRICS CRA is to be welcomed.’

How would Gordhan like a BRICS credit rating agency? Back in 2013, during his first term as finance minister, he might well have. But today? The embattled minister with a death grip on the keys to the Treasury has in effect recruited the big three in his battle with Zuma and his cronies to prevent the looting of state coffers.

The BRICS credit rating agency, if it comes, will probably be too late to help Zuma

He is using the threat of a downgrade by the big three of South Africa’s rating to junk status, to try to prevent the looting. The big three, for all their other faults, are serving Gordhan – and the country – well.

Luckily the BRICS credit rating agency, if it comes, will probably be too late to help Zuma. Perhaps that conversation between the developing countries and the big three that Kamath proposes is a better idea than a BRICS agency. And, who knows, maybe the proposal to establish one was a ploy to persuade the big three to negotiate.

If a way could be found in such discussions to persuade the credit rating agencies to sympathise more with the developing world perspective and, in this case, to release more NDB funding, for instance – without taking undue risks – that would probably help Africa too.

The African Regional Centre of the NDB is about to open in Johannesburg. Africa is likely to be at the back of the queue for NDB funds – after the five BRICS members themselves. So it needs the taps to be opened wider. 

Peter Fabricius, ISS Consultant

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