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    Climate Change and Covid-19 is the Result of a Last decade for Emerging Markets – BRICS is in the need of an Overhaul and Multinational Development Banks (MDBs) Need Urgently to Press the Recovery Button by Softening Their Credit Ratings

    September 2021

    The economic crisis induced by the Covid-19 pandemic has resulted in the most serious setback to development progress and poverty alleviation in recent memory. There is in my opinion an urgent need, therefore, to explore how to increase the lending capacity of multilateral development banks (MDBs) to enhance their support for economic recovery efforts already underway.

    The combined response by the MDB system in coloration to the global pandemic amounts to about 300bn US-dollars, which is considerably less than the increase in lending after the global financial crisis. In the case of some MDBs, a sizeable portion of this number is accounted for by the repurposing of pre-Covid lending rather than an expansion of their total lending exposure.

    The main reason why MDBs have failed to fire on all cylinders in response to the global pandemic lies in the restrictive capital adequacy policies and the associated goal of maintaining the AAA credit rating. AAA is the highest possible rating of credit worthiness that may be assigned to an institution by the credit rating agencies. A 2019 study by Riccardo Settimo of the Bank of Italy concluded that four MDBs – the World Bank, Asian Development Bank, Inter-American Development Bank and African Development Bank – could more than triple their spare lending capacity from 415bn US. dollars to 1.3tn US. dollar if they moderately increased their leverage ratio and opted for a AA+ credit rating instead. The experience of the New Development Bank (AA+ rated) in the international capital markets has demonstrated that there is a negligible difference of between 10 to 15 basis points in the funding cost of a AA+ institution compared with a AAA one.

    MDBs were created in the aftermath of the Second World War to assist with economic reconstruction and were specifically designed to play a vital countercyclical role during crisis. The global pandemic has been a powerful reminder of just how critical multilateral institutions are to dealing with global challenges, which have no regard for borders.

    These banks raise most of their funding in international capital markets by issuing bonds at significantly cheaper rates than what developing countries can raise on their own. For this reason, the AAA credit rating has been assumed to be core to their credibility and their business model.

    On September 3 this month, the leaders of the BRICS (Brazil, Russia, India, China and South Africa) held their 13th summit meeting. A few years ago, I remember, these BRICS summits used to be a global talking point, were noted, discussed, and analyzed by the media world-wide, and were being seen as an alternative economic power bloc threatening anytime soon to replace the Post-war liberal world order. However, the hype over the BRICS has disappeared so fast in recent years that this year’s summit meeting failed to get media attention at all, not even in the member countries. I find this astonishing.

    Jim O’Neill first conceived the idea of this group back in 2001, the then chairman of Goldman Sachs Asset Management. In 2006, the concept, with an eye-catching acronym, turned into reality when the four emerging economics of that time, Brazil, China, India and Russia, met informally in July 2006 at the margins of the at that time G-8 Outreach Summit in St. Petersburg. Soon after, their foreign ministers formalized it in their meeting in September 2006 on the sidelines of the General Debate of UN General Assembly in New York. Despite skepticism about their geographical distance, political, cultural, and ideological differences, the leaders of the four economically emerging nations started meeting annually since holding their first summit in Yekaterinburg, Russia, on June 16, 2003. Four-nation BRIC became a five-nation BRICS in 2011 after South Africa joined the group.

    In the first five years of existence, BRICS was seen to replace G-7’s dominates global security architecture. Hope in my opinion was on its side. The five BRICS countries host more than 40 percent of the global population, one-third of the world’s land area, and one-fourth of the world GDP. They all have enormous potential for economic growth, own abundant natural resources, and constitute huge domestic markets.

    In 2015 the BRICS countries established the New Development Bank. It was strongly encouraged to revert to first principles, to question the conventional wisdoms and establish practices of development finance. For example, in 2015 KV Kamath, the bank’s first president, questioned the benefits of a AAA credit rating for development banks given the considerable costs in terms of the levels of capital required, low leverage ratios and ultra-conservative risk limits. In the face of the worsening economic devastation from the global pandemic, the deepening climate crisis and the urgency to get back on track with the 2030 development agenda, this issue in my opinion is no longer an academic curiosity. The current capital adequacy policies of MDBs are too conservative and in my opinion no longer fit for purpose.

    Just recently the idea has been given renewed momentum. In July the G20, under the Italian presidency, announced an independent review of the capital adequacy frameworks of MDBs. This may appear to be a narrowly technical exercise, but it could hopefully result in a rewriting of the rule book as it applies to MDBs.

    While he is at the helm of the G20, Italian prime minister Mario Draghi can leave a in my opinion lasting legacy by invoking the same “whatever it takes” spirit he showed in dealing with the eurozone crisis when he was president of the European Central Bank. The ambition of the G20 was not to redesign the business model of MDBs. But it could end up having this outcome and, in the process, free up billions of dollars to be channeled towards development and fighting the pandemic as well as climate change.

    In a dozen years of BRICS’ existence, it has established Shanghai-based New Development Bank and formed BRICS Business Council, BRICS Business Forum, and BRICS Contingent Reserve Arrangement. Though China has been the real anchor of this group from its inception, in all practical purpose, the China-India partnership was used to be the crux of its allure. But that dream of the Asian century with combined strength and power of the two most populous countries of the continent has almost disappeared due to the fast widening power display between them.

    China over the years has become a major global powerhouse, and its economy is poised to overtake the US by 2028 as the world’s largest economy. Despite the pandemic, China’s strength and influence grew exponentially economically and militarily, and politically. China and Russia have also made some sort of strategic alliance to checkmate the domination of the US and its European allies at the global power table.

    While China is surging ahead economically other countries in the group have fallen far behind. China’s total GDP is more than double the combined GDPs of the other four countries in the group. The economic growth stories in Brazil, South Africa and Russia have come to a halt for some time now. Goldman Sachs, which was first to float the idea of this club, wound up its BRICS investment fund in 2015, after the loss of almost 88 percent of its asset value from the 2010 price. The growing economic crisis in India since 2016, and the devastating Covid-19 pandemic making it much worse, have ended in my opinion any hope of BRICS becoming a powerful economic grouping in the world. Therefore, a new, different kind of formation of BRICS in my opinion is required, which more balances the needs and strengths of each member country and which defines common, achievable development goals for all the members on more equal terms.

    As economics had mooted the origin of the BRICS, politics is paving the path towards its virtual demise. Coinciding with its economic downturn, India’s relations with China have deteriorated since 2016. India’s decision to sign the Logistic Exchange Memorandum Agreement (LEMOA) with the US in April 2016 and boycott the China’s Belt Road Initiative (BRI) since May 2017 put their bilateral relationship in reverse gear. And let’s not forget the two-week long, tense border standoff at Doklam between the Indian Armed Forces and People’s Liberation Army of China in 2017 which was already bad enough, both the armies came into another violent faceoff in 2020 in Ladakh. Even after more than a year, both accuse each other of intruding into each other’s territory.

    India since has banned some Chinese apps, and often there are political calls for boycotting Chinese goods. India’s enthusiastic participation in the US-led Quad has in my opinion brought an end to any hope of improving its relations with China anytime soon. For all practical purposes, the BRICS, due to intra-group political rivalry, has ceased to be a group of taking any consequential cooperative undertaking. It has in my opinion become too heterogenous politically to align its economic and strategic interests and is therefore unable to serve its purpose.

    The BRICS may continue to exist, like many other multilateral platforms. The periodic meetings of leaders and ministers help some countries to maintain a kind of working relationship despite their political, cultural, and strategic tensions with China, as the growing economic interdependence demands it. But the hope of BRICS providing an alternative global order has in my opinion already come to an end. Currently, it has become just another decorative forum in a multipolar world. But decorative forums as we all know will not help the citizens of India, Brazil, South Africa among other emerging countries nor will they revive their economies. Economies who all lost out dramatically through the pandemic. Therefore, I believe the time has come for a new plan – “Built Back Better Beyond the West” by establishing and supporting new strategic alliances as the world has changed – it changed politically, economically, and environmentally.