Home' Trinidad and Tobago Guardian : July 17th 2014 Contents JULY 2014 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
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The leaders of five of the world's
largest emerging markets will
showcase a new currency reserve
fund and development bank this
week. Critics say neither is
enough to revive the group's waning clout.
Brazil, Russia, India, China and South Africa,
known as the BRICs, will approve the creation
of the US$100 billion reserve fund and US$50
billion bank at a July 15-16 summit in Brazil's
coastal city of Fortaleza and the capital Brasilia,
President Dilma Rousseff and other officials
said last week.
The initiatives are born out of frustration
with a lack of participation in global gover-
nance, particularly in the World Bank and
International Monetary Fund, said Arvind
Subramanian, senior fellow at the Peterson
Institute for International Economics. The
measures aren't big enough to boost growth
or cohesion in the group as foreign investor
sentiment sours and member states focus on
issues close to home, such as Brazil's elections,
the conflict in Ukraine and new economic
policy plans in India.
"It's hard to see a lot of impetus at this
stage for the BRICs in general and for these
initiatives in particular," Subramanian said by
telephone from Washington. "There's going
to be a lot of attention on domestic issues."
Economic growth in the five countries is
projected to average 5.37 per cent this year,
half the pace seen seven years ago, according
to the median estimate of economists surveyed
by Bloomberg. Brazil and Russia will grow 1.3
per cent and 0.5 per cent, respectively.
Yuri Ushakov, Russian presidential aide on
foreign policy, said in an interview that the
group's growth rate is still above that of the
global average and that its economic and polit-
ical weight is increasing.
The BRICs have evolved from the original
term coined in 2001 by then-Goldman Sachs
Group Inc economist Jim O'Neill to describe
the growing weight of the largest emerging
markets in the global economy. In 2011, South
Africa joined to give the BRICs a broader geo-
graphic representation. The group's track record
in pursuing a common agenda on the world
stage has been mixed.
"It's easier to say what the BRICs aren't
than what they are," said Jose Alfredo Graca
Lima, under-secretary for political affairs at
the Brazilian Foreign Ministry.
The five countries failed to agree on a can-
didate to head the World Bank in 2012 and
the International Monetary Fund in 2011, two
posts at the heart of their demands for more
say in global economic matters.
The summit is unlikely to provide a common
front to push ahead global trade talks either,
even though the World Trade Organisation is
headed by Brazilian Roberto Azevedo. Brazil
itself has increased protectionist measures
under President Dilma Rousseff.
"I wouldn't say that there will be a common
outcome in that sense, but certainly there will
be discussion on WTO matters," said Sujata
Mehta, secretary for economic relations at the
Indian Foreign Ministry.
India and South Africa have signalled they
may backtrack on a trade facilitation agreement
reached at the WTO talks in Bali in December
2013, wrote Carlos Braga and Jean-Pierre
Lehmann, professors at Lausanne, Switzer-
land-based IMD business school.
Still, Indian Prime Minister Narendra Modi
is unlikely to rock the boat at the Brazil summit,
said NR Bhanumurthy, an economist at the
National Institute of Public Finance and Policy,
a government-backed research institute in
"Domestic issues are dominating his agenda,
especially growth and inflation," Bhanumurthy
Russia expects BRICS leaders to discuss
international issues, including the situation
in Ukraine, and speak out against "sanction
pressure," Ushakov told reporters July 10.
All BRICS members except for Russia
abstained from a UN vote that called on states
not to recognize Crimea's autonomy from
Ukraine. Rousseff yesterday hosted a luncheon
for leaders watching the World Cup final in
Rio de Janeiro, including Russia's Vladimir
Putin and Germany's Angela Merkel.
The new development bank, which won't
impose policy requirements on borrowers, will
help fill fast-growing infrastructure financing
needs, said Kevin Gallagher, professor of inter-
national relations at Boston University. The
BRICs can also use it to pressure developed
countries, particularly the US, to advance
stalled measures to make global financial insti-
tutions more equitable, he said.
"They can say, look, we have an alternative,'"
Gallagher said in a phone interview. "It gives
you a lot of political leverage."
With an expected startup capital of US$50
billion financed equally by the five members,
the bank could lend US$3.4 billion per year
in a decade, according to a March study by
the United Nations Conference on Trade and
Development. That compares with the US$61
billion the World Bank expects to lend this
The bank will require legislative approval
from member countries and at least one year
to be implemented. It will eventually open
membership to non-BRICs countries and coin-
cides with plans for an Asian infrastructure
development bank spearheaded by Beijing,
according to an official at the Brazilian Finance
Ministry, who requested not to be named
because he's not authorised to speak publicly
on the matter.
The BRICs bank, along with the separate
US$50 billion Asian infrastructure bank, is
another way for China to get higher returns
on its US$3.9 trillion reserves than it does from
buying US Treasuries, said Oliver Rui, professor
of finance and accounting at the China Europe
International Business School in Shanghai, the
favorite city to headquarter the bank.
Multilateral lending agencies are also a way
for Beijing to legitimise investments abroad,
after nationalistic backlashes in Africa against
Chinese investment, said Subramanian.
China's Finance Ministry did not respond
to faxed questions for comment about the
China will also fund US$41 billion of the
currency reserve agreement, which member
countries will be able to tap in case of balance
of payment deficits. South Africa will earmark
US$5 billion of its reserves and the remaining
countries will set aside US$18 billion each.
Details on the functioning of the US$100 billion
agreement, which amounts to two per cent of
the BRICs' pooled reserves, have yet to be
The Brazilian real is the second-best per-
former this year with a 6.35 percent gain, and
the rand the second-worst among 16 major
currencies tracked by Bloomberg with a two
cent loss. The rupee has gained 3.1 per cent
and the ruble has lost 3.95 per cent.
Each country would have a limited amount
of cash it could draw on from the currency
reserve, and lenders have an opt-out clause,
allowing them to drop out of the agreement
any time, according to the Brazilian official.
"There are many unanswered questions still,"
said Domenico Lombardi, director of global
economy at the Waterloo, Ontario-based Centre
for International Governance Innovation. said
in a telephone interview. "The measures are
more symbolic, designed to show they have
alternative instruments to the IMF and World
Venezuela is an increasingly painful thorn in
the side of the airline industry, among other
The currency crisis in Venezuela is making
it difficult for multinational companies to turn
a profit in the South American nation.
Air France KLM became the latest to sound
the alarm. The Franco-Dutch airline now pre-
dicts weaker earnings this year due to, among
other things, "the challenging situation in
The profit warning comes amid an ongoing
dispute between the airline industry and the
government of Venezuela over the nation's for-
eign exchange policies.
Delta, which has flown to Venezuela for 15
years, recently announced plans to slash its
daily service between Atlanta and Caracas to
one flight per week, beginning in August.
American Airlines said in its latest quarterly
report that it has about US$750 million in cash
tied up in Venezuelan currency. That money
would be subject to three different exchange
rates if American tried to convert it into US
dollars, causing a big headache and a cut in
In a statement, American said it has "sig-
nificantly reduced" its flights to Venezuela as
of two weeks ago. The company said it is "owed
a substantial outstanding amount" and has
"been unable to reach resolution" with the
Air Canada suspended service to Venezuela
in March, citing the civil unrest that was rocking
the nation at that time. But the airline also
blamed "onerous currency restrictions imposed
on all airlines."
A total of 24 airlines are unable to bring
home a combined US$3.9 billion from Venezuela
at "fair" exchange rates because of the govern-
ment's currency controls, according to the
International Air Transport Association, a trade
group that represents the industry.
But it's not just airlines that are feeling the
Coca-Cola said in April that its Venezuelan
subsidy took charges of $247 million related to
"the devaluation of the Venezuelan bolivar."
Procter & Gamble and Colgate-Palmolive
both said changes in Venezuela's exchange rate
weighed on earnings in the first three months
of the year. It's not an entirely new problem.
Merck reported US$140 million in exchange
losses in Venezuela during the first quarter of
"Consumer products companies have fairly
large exposures in Venezuela due to the nature
of the market," said Karl Schamotta, director
of FX strategy and structured products at Cam-
bridge Mercantile Group.
Put simply, companies that sell goods priced
in Venezuelan currency are more vulnerable to
the nation's foreign exchange policies.
Schamotta said some consumer products
makers have been able to offset currency fluc-
tuations in Venezuela using political risk insur-
ance, but he said there's no way to avoid the
"The risks in emerging markets are typically
driven by political motives,"he said. "The risks
can be very high even when fundamentals are
Venezuela has had strict currency controls
in place since 2003. But President Nicolás
Maduro has aggressively devalued the Venezue-
lan bolivar since he came to power in 2013.
The country now has three different official
exchange rates, in addition to the black market
rate that many Venezuelans pay for US dol-
Critics say the government is trying to narrow
its budget deficit by undermining the curren-
cy.Meanwhile, inflation has soared and shortages
of food and basic goods, including toilet paper,
led to violent protests across Venezuela earlier
"The social unrest was a direct consequence
of the mismanagement of economy," said Diego
Moya-Ocampos, a senior analyst at IHS Country
Risk. "It's all connected with foreign exchange
BRICs fight waning clout with
US$150bn deal in Brazil Summit
Venezuela is wreaking havoc on big companies
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