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South Africa Rolls Out Particular Welcome for Launch of BRICS Bank

The long-awaited BRICS bank – officially the New Development Bank – was finally green-lit at the group's recent Russian summit. With its remit and programme unclear, South Africa is already readying its bid for new infrastructure funding.

Photo: Should the leaders of Turkey, Mexico, Nigeria and Indonesia be invited to the next BRICS summit?
Should the leaders of Turkey, Mexico, Nigeria and Indonesia be invited to the next BRICS summit?
Photo: Should the leaders of Turkey, Mexico, Nigeria and Indonesia be invited to the next BRICS summit?
Should the leaders of Turkey, Mexico, Nigeria and Indonesia be invited to the next BRICS summit?

South Africa is believed to particularly welcome the official launch of "The BRICS bank" – an institution more formally known as the New Development Bank. The long-awaited announcement of the bank's formation came during the seventh BRICS summit, held in in Russia in early July.

Emphasising the importance of the initiative, Tito Mboweni, a former governor of the South African Reserve Bank and now a non-executive director of the New Development Bank, said that the time was now right for a different kind of bank. According to Mboweni, the role of the new bank is to finance riskier, more challenging infrastructure, as well as other development projects.

Overall, the launch of the new bank has been seen as part of the BRICS countries' remit to reduce their reliance on pro-Western finance institutes, notably the World Bank and the IMF. It is currently planned that the bank will commence operations in 2016.

The bank will be headquartered in Shanghai, while its sub-Saharan regional office will be based in South Africa. It will launch with an initial capital of US$50 billion, with the aim of raising that to $100 billion. China has pledged $41 billion of support to the initiative, giving it the largest voting rights within the group.

The bank's avowed mission is to finance infrastructure and sustainable-development projects in the member states and in other developing economies. Despite this manifesto commitment, though, it's far from clear precisely what sorts of projects it will fund.

In terms of South Africa, there is no shortage of projects desperately in need of funding and there is no doubt that the country is already eying the financing opportunities the new bank may provide. A clear priority will be the country's failing electricity utilities. These are said to be in need of an estimated injection of around $20 billion over the next few years in order to complete the power plants required to meet South Africa's growing energy needs.

Ironically, despite the BRICS bloc's aim to be less dependent on Western finance mechanisms, in 2010, it was the World Bank that lent South Africa $3.75 billion to help build a coal-fired power plant, a project that remains unfinished. Whether South Africa gets the funding it needs to boost its energy infrastructure is, as yet, undecided, but it won't be for a lack of asking.

During the course of the most recent summit, South Africa and China were at pains to talk up closer financial and diplomatic ties, with the presidents of both countries pledging to strengthen cooperation within the BRICS framework. Significantly, Xi Jinping, the Chinese premier emphasised that relations between South Africa and China had never been better. The rhetoric, however, couldn't hide the fact that trade relations are currently hugely in China's favour. The summit also took place during a time of considerable global market uncertainty, something that inevitably impacts on trade between the two.

In truth, South Africa is highly dependent on trade with China. South Africa's export trade with the PRC represents three-quarters of the total value of its exports to the entire BRICS market. In a worrying development for South Africa, this is now contracting as a result of slowing demand from China for its mineral commodities.

There is also the question of whether South Africa can make its voice heard in a group whose member states' economies are many times bigger. South Africa has by far the smallest economy among the BRICS nations, which has led many to question its eligibility for membership.

Photo: Mboweni: “Time for a new kind of bank”.
Mboweni: "Time for a new kind of bank".
Photo: Mboweni: “Time for a new kind of bank”.
Mboweni: "Time for a new kind of bank".
Photo: Freemantle: “South Africa has symbolic BRICS’ role”.
Freemantle: "South Africa has symbolic BRICS' role".
Photo: Freemantle: “South Africa has symbolic BRICS’ role”.
Freemantle: "South Africa has symbolic BRICS' role".

Ostensibly, South Africa was welcomed into the BRICS group in order to promote an African agenda. Simon Freemantle, senior political economist at South Africa's Standard Bank, believes that South Africa's membership of the forum was based more on diplomatic merit than economic eligibility.

He said: "South Africa's admission to the group was more about the country's Africanness than its economic clout. Within BRICS, South Africa is seen as symbolising Africa as a whole. When South Africa applied to join BRICS, it was on the basis that it would be the African representative, the gateway to the continent. On its own, it's a very small-scale member."

According to Freemantle, South Africa nonetheless provides a strategic "African voice", one that the group needs to give it a veneer of international consensus. Whether China sees South Africa's role in quite those terms is, of course, debatable.

When it comes to the PRC's relationship with South Africa – and Africa more generally – Freemantle believes that South Africa is an important BRICS partner for China.  But only to a certain extent. Tellingly, China imports essential commodities from several African non-BRICS countries, notably iron ore from West Africa and oil from Angola. South Africa is one partner in China's African trade relations, but by no means its only bedfellow.

When it comes to certain types of investments, such as industrial logistics hubs and high-end manufacturing facilities across the continent, Freemantle believes that South Africa's gateway role is a compelling one for China. He says: "China is establishing auto firms in South Africa, for example, and China's ICBC Bank also now has a presence in the country, thanks to its 20% ownership of South Africa's Standard Bank. China has exited Libya and had its fingers burnt with the South Sudan conflict, so South Africa presents key opportunities for China on the continent."

Despite the slowing trade between South Africa and China, Freemantle believes there is still potential in their BRICS partnership saying: "It's not that trade between the two countries is dying – it's just growing less quickly. This largely reflects China's reduced demand for South Africa's mineral commodities."

In terms of trade between South Africa and China, Freemantle sees the relationship as being fundamentally unbalanced. This is largely because South Africa's exports to China are mainly unprocessed base metals, while its imports are typically high-value finished goods, significantly skewing the trade balance in China's favour. He says; "Arguably, South Africa is not getting enough value-add from the products it exports to China. This needs to be addressed at a strategic level."

Photo: The logo of the New Development Bank, BRICS’ bid to reduce reliance on Western funding.
The logo of the New Development Bank, BRICS' bid to reduce reliance on Western funding.
Photo: The logo of the New Development Bank, BRICS’ bid to reduce reliance on Western funding.
The logo of the New Development Bank, BRICS' bid to reduce reliance on Western funding.

In more far-reaching terms, Freemantle also believes that BRICS may need to consider expanding its membership if it is to remain truly relevant. He says: "BRICS should consider including Turkey, Mexico, Nigeria, Indonesia…"

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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