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BRICS Long-Term Strategy

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and resulted in a deterioration of their current account deficits along with a sharp 

depreciation of their domestic currencies. By September 2013, the Indian Rupee 

and the Brazilian Real had each fallen by more than 16 per cent (Kumar and Barua, 

2013). To maintain sustainable exchange rates, nominal interest rates were raised 

at the expense of real economic growth. 

FIGURE 4

Exchange rate depreciation (May-December 2013)

(In %)

27.5

12.2

14.2

13.3

19.0

16.1

22.4

13.5

12.3

16.5

0

5

10

15

20

25

30

INR

IDR

ZAR

TRY

BRL

May to September 2013

May to December 2013

Source: Yahoo finance.

2 MAIN CHALLENGES

2.1 BRICS and the global financial architecture

Emerging and developing economies can coordinate and effectively use the 

International Financial Architecture to address common concerns. The Group of 

20 (G20) can be a particularly useful platform for this. In addition, BRICS has 

made rapid strides in burden sharing and financial integration towards a more 

robust global economy. 

In 2009, at the height of the financial crisis, the heads of the G20 nations 

met in London to draw up an action plan to stabilise the global economy. 

This led to the trebling of the IMF’s resources to USD 750 billion, establishment 

of a new Financial Stability Board (FSB) and a USD 100 billion increase in the 

lending capacity of the Multilateral Development Banks (MDBs).

Despite the efforts made by the G20 the global economy still stands on a 

shaky foundation. Emerging and developing economies could still be affected 

by spill-overs originating from changes in advanced economies’ policies and 

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performance, as well as by excessively borrowing from financial institutions. 

Recent crises have shown the importance of creating mechanisms to make these 

institutions participate in the adjustment processes of the affected economies. 

The actual role of risk rating agencies is an additional issue, in that their usual 

criteria for risk classification is far too concerned with liquidity and solvency, disre-

garding other indicators of the actual economic potential of developing countries. 

Also, their high ratings to a number of financial operations have contributed to 

deepen the recent sub-prime crisis.

Excess liquidity spill-overs lead to cross-border banking flows, exchange 

rate volatility, and overvalued assets in capital-receiving countries (Rajan, 2013). 

These spill-overs work via a channel of easier borrowing that increases asset prices 

and reduces leverage-linked risk perceptions. Concomitantly, the timing and pace 

of withdrawal of UMPs should be sensitive to the prevailing financial conditions 

in the emerging and developing economies.

Surges in capital outflows have resulted in an array of macro-prudential measures 

such as a 2 per cent tax on equity and bonds by Brazil (Wheatley, 2009), as well as a 

restriction on outward investment from 400 per cent of the investor’s net worth to 

100 per cent in India (Mallet, 2013). Such measures in addition to hikes in domestic 

interest rates are a natural defence against short-term spill-overs from UMPs. To build 

long-term resilience, however, emerging and developing economies have once again 

started accumulating foreign exchange reserves to prevent future outflows and exchange 

rate destabilisation. Advanced economies should consider the long-term implications 

of the UMPS, chief among them the formation of a new savings glut.

Systemically Important Financial Institutions (SIFIs) are defined as financial 

institutions in which distress or disorderly failure – because of their size, complexity and 

systemic interconnectedness – can cause significant disruption to the wider financial 

system and economic activity (Financial Stability Board, 2011). Governments around 

the world have been forced to bail out such institutions following the financial crisis. 

This has created a moral hazard and exacerbated already precarious fiscal budgets. 

The G20 has tasked the FSB with the development of a multi-pronged frame-

work to reduce the likelihood of failure of SIFIs, prevent large taxpayer bailouts by 

orderly resolution of a failing SIFI and minimise the systemic risk via macro-

prudential regulation. Although unilateral efforts such as the Dodd-Frank Act of 

2010 as well as a series of ‘stress tests’ have sought to limit systemic risk in the 

financial system, they have inadvertently also forced banks to limit their exposure 

to riskier loans and scale down their operations, especially in the emerging and 

developing economies. However, it is important to ensure that BRICS countries 

are able to balance greater regulation with domestic growth imperatives such as 

infrastructure creation. 

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2.1.2 Basel III 

Basel III is a comprehensive set of recommendations, developed by the Basel 

Committee on Banking Supervision, to strengthen the regulation, supervision and 

risk management of the banking sector. Although G20 members have broadly agreed 

to the recommendations within the Basel III framework, important concerns have 

been raised in the past by the emerging and developing economies. These must be 

addressed in line with the implementation timeline of the regulations. 

The first regards capital requirements. Recent research has found that a 20 per 

cent increase in capital stocks and liquidity reserves would diminish GDP per capita 

by 2 per cent globally, but by 3 per cent in emerging and developing economies 

(Masters, 2012). The Basel III framework has also introduced a Countercyclical 

Capital Conservation Buffer (CCCB) that prevents banks from excessive lending 

during periods of high credit growth. For example, the CCCB is triggered when 

indicators such as the credit-GDP gap

2

 reach a predetermined threshold limit. 

However, given different circumstances for emerging and developing markets, such 

as stage of economic development, maturity of financial markets and the progress 

of structural transformation, non-contextual application of these indicators could 

undermine the priority of economic growth. 

The second related concern pertains to stringent liquidity requirements. Under 

the Basel III framework, banks are required to maintain a minimum Liquidity 

Coverage Ratio (LCR) to ensure that they have sufficient High Quality Liquid 

Assets (HQLA) to survive a stress scenario lasting 30 days (Bank for International 

Settlements, 2013). The HQLA typically comprises short-term government securities 

and high-quality corporate bonds – instruments that are in limited supply in 

capital markets of many emerging and developing economies. 

2.1.3 Burden-sharing arrangements

The volatility of capital flows in emerging and developing economies stemming 

from UMPs in advanced economies exposes a fundamental vulnerability in their 

macroeconomic model. To counter this, emerging and developing economies 

have typically resorted to the rapid accumulation of foreign exchange reserves. 

IMF lending has been used as a last resort by countries unable to summon the adequate 

financial resources to prevent a full-blown crisis. Most recently, the foundations of 

the Contingent Reserve Arrangement (CRA) were established by BRICS. 

The CRA is a framework for the provision of support through liquidity and 

precautionary instruments in response to actual or potential short-term balance 

of payments pressures, with an initial size of USD 100 billion.

2. The difference between actual credit–GDP and long-term trend of credit–GDP.

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Drawing on the experience of other regional cooperation arrangements, 

the CRA has adopted a two-tier governance and decision-making structure, with 

strategic issues decided by consensus of a Governing Council and operational 

issues decided by majority votes of a Standing Committee. Votes are in proportion 

to individual members’ committed resources, with a certain portion of basic votes 

equally distributed among members.

The CRA provides two instruments in response to different BOP pressures, 

a liquidity instrument to address the actual BOP difficulties and a precautionary 

instrument to preempt any potential pressures before the actual ones emerge. 

Both instruments are to help stabilize expectations, reduce uncertainties and improve 

market confidence, therefore, to mitigate the adverse impacts of external shocks 

and stabilize the domestic situation for BRICS.

Financial operations under CRA are well secured. The CRA requires most 

drawings of committed resources to be linked to the IMF arrangement. 

Nevertheless, to allow prompt support under urgent conditions, up to 30 per 

cent of the maximum access could be drawn upon approval in the absence of an 

IMF arrangement. Besides, the CRA also requires comprehensive conditions to 

be met for the approval of any drawing or renewal request, and specify members’ 

obligations under the CRA arrangement.

Given the rising volatilities and risks on the global market, and the standstill 

quota reform and inadequate resources of the IMF, emerging markets have to 

resort to regional and bilateral monetary cooperation to seek financial stability in 

an in complete global financial safety net. The CRA as a cross-region monetary 

cooperation will supplement the global financial safety net by adding a new layer 

and new resources available, helping to strengthen financial stability of BRICS and 

the world as well. Moreover, by launching the CRA, the BRICS countries have 

not only make solid progress towards multilateral cooperation, but also enhance 

the collective capacity of coping with external shocks, and provide continuous 

momentum and broader potential for future cooperation. However, safety nets 

fail to completely insure the inherent systemic risk that emanates from adverse 

spill-overs from UMPs and an over-reliance on the US dollar. BRICS collectively 

could evaluate more alternatives to minimise systemic risk by exploring arrangements 

that target underpinning systemic issues in the global financial system. 

2.1.4 Alternatives to the US dollar

Empirical literature (Papaioannou and Portes, 2008) identifies certain key 

factors for internationalisation of a currency: economic strength and market size; 

low inflation and exchange rate stability; deep and efficient financial markets; 

and political stability and geopolitical strength. The US dollar fulfils the above 

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criteria. Additionally, the financial crisis and the ensuing QE programmes have 

not diminished the dollar’s role as a “safe haven” asset. Indeed, the strength of the 

US dollar can be seen from the two tables below – it is the dominant currency 

in the global foreign exchange market as well as the international money market. 

TABLE 1

International money market instruments, amount outstanding (Mar. 2014)

(In USD billions)

Currency

Commercial Paper

Other Instruments

USD

194.7

132.4

EUR

178.4

142.7

JPY

1.5

0.6

GBP

107.1

81.9

AUD

3.5

1.8

CHF

3.8

3.4

Other Currencies

24.8

20.3

Source: Bank for International Settlements (BIS).

TABLE 2

Currency distribution of global foreign exchange market turnover (Mar. 2014)

Currency

Share (%)

Rank

USD

87.0

1

EUR

33.4

2

JPY

23.0

3

GBP

11.8

4

AUD

8.6

5

CHF

5.2

6

CAD

4.6

7

MXN

2.5

8

CNY

2.2

9

NZD

2.0

10

Source: Bank for International Settlements (BIS).

Most emerging and developing economies fail to fulfil the necessary criteria to 

internationalise their currencies. To reduce dependence on the dollar and diversify 

risks, alternatives could be developed through enhanced and sustainable forms of 

financial integration between the five BRICS economies. 

The Standing Drawing Right (SDR) is an international reserve asset created 

by the IMF in 1969 to supplement member countries’ official reserves. Its value 

is a weighted average of four international currencies – US dollar (41.9 per cent),