BRICS Think Tank Forum on Financial Cooperation, 22-23 March 2017, Beijing, China

1. BRICS Think Tank Forum on Financial Cooperation, 22-23 March 2017, Beijing, China BRICS Finance: Multilateral Cooperation in a Time of Crisis Dr. Jaya Josie, BRICS Research Centre, HSRC, South Africa

2. Global Financial Crisis (GFC) Factors & BRICS • 2008 crisis revived DEME cooperation in the face of the US Fed’s dominant role as the international lender of last resort (ILOLR) for the world (Duran 2015) • Two critical GFC consequences for BRICS & developing & emerging market economies (DEME): volatile international capital flows & recognition of the risks of dollar dependence in trade & growth. • BRICS need to strengthen financial cooperation through a multilateral approach to mitigate the risks of: • Volatile international capital flows • Dollar dependence • Re-emergence of Triffin’s Dilemma in US$ dollar dominance in international finance (Rojas, 2016) • Financialization of the global economy & low productive investment

3. US$ Unipolar financial dominance - Triffin’s Dilemma (Robert Triffen 1960): ‘US stop issuing US$ balances for international finance leading to global stagnation & deflation; or continue to issue more US$ as an international reserve risking ultimate loss of confidence in the currency’ (Rojas, 2016)

4. GFC - Developing & Emerging Market Economies (DEME) • International finance system can’t keep pace with changes in DEME. • Short-term capital flows transmit instability & fails to provide liquidity management to deal with volatility. • Shortage of high-quality or safe assets in cross-border transactions. • US$ dominance limits ability to mitigate capital flow volatility, credit or legal risk to strengthen liquidity safety net for DEME • IMF’s financing with liquidity-driven balance of payments contingencies not achieved intended objectives. • BRICS must consider feasibility of its own mechanisms for settling financial transactions & remove the necessity for payments in two-way foreign exchange trades via the US$. • BRICS cooperation between China and Russia growing using own currency settlement as two-way trade increases & negotiations on a package of currency swaps have begun. • China promoting the use of RMB & investment via the China-Russia Investment Fund targeting greenfield investment, equity investment, bond issuance, mergers & acquisitions.

5. Principles for Multilateral Finance Cooperation • BRICS Summit declarations & trade ministers decisions – a multilateral political economy approach to finance cooperation • Multilateral finance cooperation rationale (Kalecki, 1946; Bhaduri, 1986) • solidarity & mutual benefit in the face of unipolar financial dominance • ensure better utilization of global resources • address economic slowdown, unemployment and inequality • high levels of investment demand for finance & other resources • avoids political disputes • better system if there are no problems with balancing imports with exports • mutual solidarity in event of external shocks • Spread & maintenance of debt financed domestic & foreign net expenditure for growth & development for full employment

6. Towards Multilateral Finance Cooperation • A Multilateral approach ensures investment toward full employment (Kalecki, 1946) as interconnected economies reduce disputes through negotiation • Joint BRICS study examines options for a common BRICS payment mechanisms to reduce dependence on US$. • Existing mechanisms include • Swap Agreements • BRICS Currencies = Real, Rouble, Rupee, RMB, Rand = R5 • BRICS Contingency Reserve Agreement (CRA) to cushion against external shocks • BRICS currencies recourse to a gold reserve • A BRICS international reserve currency (e.g RMB) for payments

7. International Reserve Currencies in Transactions Figure 1: IMF weight of Renminbi among SDR reserves currencies • Trade relations & trade rivalries are dominated and determined by Dollar, Euro, Pound sterling & Yen among developing and emerging countries • Trade & Investment in BRICS is in the forefront in boosting economic growth and sustainable development

8. Intra-BRICS trade • China was the leading trade partner for BRICs countries • South Africa's share was the smallest in each of BRICS markets • kkk

9. Economic performance trends in BRICS countries Figure 2: Exchange rate in BRICS countries Currencies have been weakening against the US dollar during the period Figure 3: GDP growth rates in BRICS countries .

10. Brazil From Bilateral to Multilateral Financial Cooperation South Africa Russia China India

11. Measuring BRICS Multilateral International Economic Integration (IEI) (Kali & Reyes, 2007) • Linear bilateral indicators inadequate measure (IEI) for multilateral cooperation network. • IEI measures of all possible relationships present in the network • The bilateral IEI ratio is called network density. • Measures the proportion of bilateral trade relationships • Multilateral IEI is the property of network transitivity or clustering. • Measures probability that ‘the partner of my partner is also my partner’, • Reveals the “neighborhood” structure of the network. • Where global share of multilateral relations higher than bilateral links of each nation in the group • Where sum of the whole of BRICS IEI is greater than the sum of its parts • IEI Enables use of trade statistics to show structure & evolution of global trade for: • number of actual and potential trading partners, • the structure of regional trading, • influence of individual countries & groups in a multilateral network

12. Brazil Measuring Multilateral Finance Cooperation South Africa Russia China India

13. Testing Convergence Criteria for Use of BRICS Currencies(Ncwadi, Josie & Siswana, 2017) • Test whether the BRICS currencies converge in the long run using cointegration VAR Model and US$ Purchasing Power Parity (PPP). • To establish If an economically meaningful cointegrating exists, and the direction of causation between output and financial integration. • The results showed significant convergence between Russia and Brazil. South Africa shows evidence of convergence in a long run but such convergence is not statistically significant. • Test using PPP suggests evidence for BRICS transactions in member currencies • BRICS currencies for intra-BRICS financial relations depend on the level of economic ‘convergence’ among member states. Convergence criteria: • Sufficiently prepared for adoption of other BRICS currencies, & smooth integration into BRICS monetary regime. • Legal convergence requires national legislation, in particular compatibility of central bank & monetary policy. • Public transparency so that people are kept well informed.

14. Cointegration Results • Trace test results shows at least 2 cointegration equations in VAR model • Eigenvalues provides cointegration in BRICS currencies in a long run • SA currency has been losing PPP compared to other BRCS countries

15. China RMB BRICS Swap Agreements Bilateral swaps create global liquidity in a variety of currencies and contribute significantly to the emergence of a multi-currency world (Duran 2015)

16. Recourse to Gold Reserves • The Official Monetary and Financial Institutions Forum (OMFIF) 2016 Report: Gold attractive as alternative to some reserve currencies that are weakening against the US$ • DEME economies keen to diversify away from U.S.$ assets. • Deflationary pressures across DEME raise the importance of gold as a store of value & hedge against market instability. • About 30% of Russia's $400 billion worth of hard currency reserves are currently held in U.S. Treasuries. • Plans to reduce share of U.S. treasuries and work with other instruments • China launched new gold fix/benchmark mechanism (Shanghai Fix) in 2016 priced in the yuan. The Shanghai Gold Exchange listed the benchmark price for 99.9% of gold at 256.9 yuan, which is $39.71 per gram. • People’s Bank of China setting benchmark for the price of gold twice a day in the yuan or the renminbi.

17. Gold Reserves in BRICS countries Table: gold reserves in BRICS countries 2005-2015 • China & Russia added almost 50 million ounces of gold while selling off more than $267 billion of Treasuries. • BRICS holds half of global foreign exchange & gold reserves (Huang, 2016) • China is dominating followed by Russia, India, Brazil & South Africa • China has highest gold reserves in the group • Can a gold backed CRA provide basis for strengthening BRICS finance cooperation?

18. Concluding Proposition • Should move to more multilateral functional development approach to trade, integrating value chains, and including services to advance intra-BRICS economic cooperation. • Multilateral economic cooperation requires strong negotiated multilateral finance cooperation targeting balanced trade & development integration as an instrument of policy towards full employment • Strong BRICS multilateral financial cooperation in a time of crisis requires systemic liquidity management tools to deal with extreme episodes of volatility. Could include: • BRICS currencies for intra-BRICS financial relations • Swaps for supporting liquidity in BRICS currencies to move away from unipolar currency dominance to a multi-currency world • Strengthen the BRICS CRA values using gold reserve commitments • Consider multilateral adoption of the RMB as an international reserve currency for intra-BRICS financial transactions • Deepening BRICS financial integration & introduce instruments such as collateralised lending arrangements & credit rating system to mitigate credit risks

19. Multilateral Financial Cooperation