7th August 2014
Emerging markets have submerged over the past years, with their one time promise failing to keep up with the reality of more mature equity arenas. But longer term, led by the BRICS (Brazil, Russia, India, China and, some say, South Africa) the world economic balance is shifting with new rising economic powers are questioning the status quo. This could cut the power of the IMF and the World Bank, both accused by growing economies of policies that stifle their ambition.
Dean Newman, Head of Emerging Markets Equities at Invesco Perpetual, believes there is now a perceptible shift in economic power due to emerging markets’ growing share in global GDP.
The big question for investors is whether that extra power will be reflected in an equity price recovery and further surge forward.
But if Newman is right, it will herald the end of US economic hegemony, a fact on the world stage since the 1944 Bretton Woods agreement. US supremacy has meant global institutions such as the International Monetary Fund (IMF) and the World Bank are based in Washington.
Late last month BRICS leaders agreed to create a new development bank and a currency contingency fund. This acknowledges the shift in economic power towards emerging countries and a greater equality intended to benefit for all stakeholders.
These BRICS nations account for more than a quarter of global GDP but are underrepresented in international financial institutions. Their combined current share of IMF voting rights amounts to only 11% with China’s own share less than a quarter of the United States despite China being likely to overtake the US this year as the world’s biggest economy.
The new BRICS development bank will see each country will contributing a similar amount towards the bank’s funding and a rotating presidency whereas the IMF is always led by a European national, while the World Bank is run by an American.
Both of these Washington-based organisations are seen by emerging market nations as past their sell-by date, regarded as over-bureaucratic with loan conditions skewed towards more mature nations even when they are both essential for infrastructure programmes and are backed by good covenants.
Newman believes the effect of this new $100m currency fund could be a powerful tool in combating excessive market pressure on currencies such as the Brazilian real or Indian rupee.
The new fund, free of any US or European veto power, may attract interest from other developing countries. But it does not come without potential challenges.
Newman concludes: “The setting up of these new institutions comes with considerable operational challenges. We believe it is a small step on what is likely to be a long journey. Although they are unlikely to replace the well-established Western-based institutions we can reliably call upon now, greater competition may spur the likes of the IMF and the World Bank to become more efficient.”
The New Development Bank will be based in Shanghai and to be led by a yet-to-be named Indian. It will start initially with $50 billion in capital but increase to $100 billion when other emerging countries join. This institution will focus on infrastructure and sustainable development.